Results season is always a time to take stock and re-evaluate. If you're lucky, you can pat yourself on the back for a great job picking great stocks. Most of the time, you'll have to take the good with the bad.
Some of the time, however, it will become apparent that the prospects of your company aren't living up to the hype. Here are three companies that I think fall into the latter category:
Link Administration Holdings Ltd (ASX: LNK)
Link had a decent result, swinging to a $42 million profit after a $4 million loss last year. Unfortunately, revenues only grew 1% and most of the company's growth came via cost cutting. Link has further cost cutting measures in mind as it retires outdated systems over the next couple of years, but the fact is that the company is priced at around 30x its estimated full year earnings.
That looks really expensive to me, for a company with 1% revenue growth and earnings growth coming via lower costs. Link does have some nice stuff like high margins and lots of recurring revenue, but it looks pricey to me and I would consider taking some money off the table.
Healthscope Ltd (ASX: HSO)
Although share prices have pulled back somewhat, it's become apparent that Healthscope's organic growth potential is modest – maybe a couple of % points per annum. How can a company grow the number of hospital bed days utilised in a year? It's a tough sell.
Healthscope is expanding its footprint through development of new facilities, and as it scales up it could benefit from some cost-saving measures. It might even be the next Ramsay Health Care Limited (ASX: RHC). However, for the present, it remains a low-margin business with uninspiring levels of organic growth, and it would have to fall substantially to get me interested.
Bellamy's Australia Ltd (ASX: BAL)
Unlike with Healthscope and Link where my concerns are more from a valuation perspective, Bellamy's has core business problems that are concerning. In addition to a complete change of executives, profits have fallen and the company faces big challenges with a huge pile of inventory, minimal cash, and take-or-pay arrangements with its supplier. In its latest results, the company also downgraded the full-year forecasts that were only recently set.
While a new board and CEO could turn things around, Bellamy's faces structural challenges with a weak balance sheet and I would consider selling this one today.
