The improved performance of the US economy helped support services company Compass (LSE: CPG) to post higher pre-tax profit in the first half of the financial year, as highlighted in today’s results release. However, the gain was limited by restructuring costs and a slowdown faced in Australia so that pretax profit was £1.16bn; up from £1.14bn in the first half of last year.
Clearly, Compass is a relatively stable business and, looking ahead, it stated today that it is on-track to meet full-year expectations. Furthermore, its restructuring programme is on target and, with Compass having posted positive bottom line growth in each of the last five years, it is among the most resilient companies listed on the FTSE 100.
However, this appeal means that Compass’ valuation is now rather high, with the company trading on a price to earnings (P/E) ratio of 19.4. And, with its bottom line due to rise by just 4% this year, it may struggle to post exceptional capital gains. So, while it could have a role as a defensive stock within a portfolio in case the wider index comes under pressure, stellar returns may not be on the cards.
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Also reporting today was diversified services company Intertek (LSE: ITRK), with it being on-track to meet its guidance for the full-year. Excluding the impact of negative currency changes, Intertek’s underlying performance has improved in recent months after a rather subdued start to the year and, while its industry services arm is experiencing challenging trading conditions as a result of its exposure to the oil and gas sector, Intertek is still forecast to increase its bottom line by 1% in the current year.
Clearly, this rate of growth is rather disappointing but, looking ahead to next year, Intertek is expected to increase its earnings growth rate to 8%. This, though, means that Intertek still trades on a relatively unappealing forward P/E ratio of 18.2, thereby indicating that capital gain prospects may be limited.
Meanwhile, Rio Tinto (LSE: RIO) could see its shares come under further pressure over the short to medium term. That’s because the outlook for the iron ore market is rather uncertain and it would be of little surprise for the market to price in further challenges for the sector. That’s particularly relevant when Rio Tinto is forecast to post a fall in earnings of 48% in the current year, followed by a further decline of 12% next year.
This expected earnings disappointment puts Rio Tinto on a forward P/E ratio of 14.8 and, with it having adopted a sound strategy of reducing costs and increasing production so as to squeeze higher cost rivals, it could emerge in a relatively strong position from the current mining downturn. This, alongside a yield of 6.6%, indicates that now could be a logical moment to buy a slice of the business for the long term, although in the short run Rio Tinto’s share price could be subject to further falls.
