Investing for the long term can be a very sound means of increasing your net worth. After all, it takes time for changes to business models to have an effect, for dividends to compound, and for investor sentiment to change for the better.
However, by investing for the long term, there must be an acceptance that there will be downs as well as ups. In other words, over a multi-year period, no company will deliver smooth earnings growth or exist without internal or external challenges.
So the slowdown in the defence industry is unlikely to be a major surprise to its investors, with the likes of BAE (LSE: BA) and Rolls-Royce (LSE: RR) experiencing challenging trading conditions. A key reason for this is the austerity which has eaten into developed nations’ defence budgets and, with both companies having released at least one profit warning apiece over the last two years, their share prices have slumped by 6% (BAE) and 20% (Rolls-Royce) since the turn of the year.
Although disappointing, the present time presents an opportunity to buy BAE at a low ebb. For example, it trades on a price to earnings (P/E) ratio of just 11.8, which indicates that there is considerable upward rerating potential. And, with its bottom line forecast to rise by 5% next year, the switch from negative profit growth to positive could cause investor sentiment to improve, while a yield of 4.7% remains hugely enticing.
For Rolls-Royce, though, the next couple of years are set to become progressively tougher. Its earnings are expected to fall by 17% in the current year, followed by a further fall of 19% next year. This puts the company’s shares on a forward P/E ratio of 15.8, which indicates that they could come under further pressure moving forward. And, while Rolls-Royce has a sound management team which is likely to turn the business around in the long run, it may be best to wait for a keener share price before buying a slice of it.
Meanwhile, the tobacco and beverages sectors have also endured difficult trading conditions. The former is seeing persistent volume declines in cigarettes, while pricing continues to be a challenge for non-alcoholic beverages sellers. Despite this, the share prices of British American Tobacco (LSE: BATS) and Britvic (LSE: BVIC) have beaten the FTSE 100 this year by 12% and 5% respectively and, looking ahead, further outperformance could be on the cards.
In British American Tobacco’s case, its move into e-cigarettes presents a real opportunity to stimulate its top line in future years. And, with continued pricing potential across both developed and developing markets, it is likely to return to mid to high single digit earnings growth over the medium to long term. This makes its P/E ratio of 18.4 appear to be very reasonable.
Similarly, Britvic is due to post a rise in its bottom line of 8% in the current year, followed by growth of 9% next year. This puts the company’s shares on a price to earnings growth (PEG) ratio of only 1.6, which indicates that they have scope to rise in 2016 and beyond. And, with Britvic paying out just half of its profit as a dividend, shareholder payout growth could be strong and boost its 3.3% yield.
