The recent stock market crash leaves plenty of opportunity for investors to grab a bargain. But I worry that some share pickers are starting to get a bit ‘scattergun’ with their cash deployment. Take buyers of De La Rue (LSE: LON:DLAR) shares as an example.
Its stock has more than trebled in value since Monday as fresh trading details prompted a stampede. Then the FTSE 250 firm advised it has enjoyed “a strong start to the new financial year,” the business enjoying “a series of significant contract wins for both its Authentication and Currency divisions” since the beginning of April.
De La Rue’s Authentication unit has secured contracts with total lifetime value exceeding £100m, it said. This includes a five-year accord to print polycarbonate data pages for the new Australian passport. Meanwhile, its Currency division is enjoying “strong demand” so far in fiscal 2021 and it has won contracts representing around 80% of available currency printing capacity for the full year.
Rising from the stock market crash On the one hand, the degree of fanfare following De La Rue’s latest update is understandable. News coming out of the money printer has been a steady flow of misery in recent years. Revenues have crashed, contracts have been missed out on. It’s been investigated by the Serious Fraud Office, and the amount of debt on its balance sheet has ballooned.
I worry, though, that dip buyers have got a bit too giddy since Monday’s update. They’ve looked at De La Rue’s low valuation and been tempted to take a punt on a firm that could finally be bouncing back.
Even despite those recent share price gains, De La Rue still looks cheap on paper. At current prices around 120p, it carries a forward P/E ratio of around 7 times. There’s a reason why the battered blue-chip still carries such a meagre rating though. The structural problems affecting its key markets still cast a shadow over its very existence.
Money trap The progression to an increasingly cashless world has been staggering. In Britain, for example, the number of people using cash once a month, or less, has more than doubled in two years, according to UK Finance. The Covid-19 outbreak has likely hastened the number of people dumping physical cash for debit/credit cards, due to infection fears and the spike in e-commerce activity.
Therefore, De Le Rue still faces considerable long-term challenges. It also has to tackle a significant short-term problem in the form of its smashed-up balance sheet. That’s a problem that prompted it to warn just last November that there’s “material uncertainty that casts significant doubt on the group’s ability to continue as a going concern.”
This is one share I’m not prepared to gamble my hard-earned money on. There are many other brilliant dip buys to go shopping for following the stock market crash. So why take a risk on De La Rue?
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020