1 FTSE 250 stock that could be a scream buy for me in November

Dowlais Group (LSE:DWL) One FTSE250 It’s an engineering job that I hadn’t heard much about until this year. But the more I look, the more I think there could be incredible value here.

The stock looks cheap, at around 8x free cash flow and a 7.5% yield dividend yield. But interesting things are just beginning.

What does Dowlais do?

Dowlais consists of two business divisions. This number was three in 2023, but the firm has since divested its hydrogen storage solution.

By far the largest division is the automotive operation. It accounts for around 80% of revenues and produces propulsion systems used in around half of all light vehicles worldwide.

The rest of the company is in the powder metal business. It is the market leader in this sector and has more than 3,000 customers.

In its interim report in August, Dowlais announced that it was considering selling its Powder Metallurgy division. I think the potential opportunity for investors could be here.

Powder Metallurgy generated revenues of just over £1bn and operating profits of £96m in 2023. Since then, sales have fallen slightly but operating income has remained stable.

The obvious question is what Dowlais could gain by selling the operation. It’s hard to predict exactly, but I think there’s a big margin of safety at today’s prices.

I think a conservative estimate would result in sales of 3x the operating income of the Powder Metallurgy business. This would generate revenue of around £288 million.

The point is that Dowlais is a market value £730m This means investors can be left with the core automotive business, which had operating income of £306m last year at a price of £442m.

An incredible bargain?

From what I see, this could potentially be a rare opportunity for investors. I’m very interested, but there’s a lot more to think about.

First, the automotive business, which is the part where investors will be left behind, will be in a difficult situation in 2024. Sales in this part of the company fell 10% in the first half of the year.

Investors need to take this into consideration, but it’s also worth keeping in mind that management attributes this to the slowdown in car sales. And I expect this to resolve itself over time.

That’s why the share price is falling. However, I think the stock has reached the point where the value offered to investors more than justifies the risks.

looking beyond the surface

Dowlais posted negative earnings in the first half of 2024, making the stock look expensive and signaling that dividends are in danger of being cut. I don’t think either of these are the case.

The reason for the negative profit was the impairment of goodwill in the Powder Metallurgy business. Without it, the firm made profits of just over 4p per share.

If Dowlais decides to sell this part of the company, and does so successfully, I think the shares could look incredibly cheap. I’m thinking of starting to buy in November.