Investors often make the biggest profits from quite dull-sounding companies. Take HSBC Holdings (LSE: HSBA) and engineering firm Costain Group (LSE: COST).
Both companies are ignored by many private investors, but I believe they could be profitable buys in today’s market.
Costain
Costain shares rose by about 3% to 377p this morning after the firm said its order book grew by 11% to £3.9bn in 2015 – a new record.
The engineering solutions provider said that full-year results for 2015 were expected to be in line with expectations. That puts Costain shares on a 2015 forecast P/E of 16.
At first sight, this doesn’t seem especially cheap. But since its 2014 refinancing, Costain has maintained a significant net cash balance. The firm said today that net cash was £100m at the end of 2015. Given that Costain’s market capitalisation is only £375m, this cash needs to be taken into account.
Based on Costain’s interim accounts, I reckon around £50m of its cash is probably surplus to requirements. Removing this from the firm’s valuation gives a more attractive P/E of 14.
Costain may seem like a dull company, but the firm’s shares have risen by 77% over the last five years. During this period, total dividends of about 48p have been paid, taking the five-year total return to more than 100%.
I believe that Costain’s focus on larger and more complex infrastructure projects is a plus. It enables the group to add more value than through simple construction work and could also provide protection during the next construction downturn. Customers seem to agree. Costain said today that 90% of its order book is repeat business and that it has secured revenues of more than £2.8bn for 2017 onwards.
HSBC Holdings
HSBC has often looked cheap in the years since the financial crisis, but has been a disappointing investment. The bank’s shares have lost 20% of their value over the last five years as it has failed to meet its own performance targets.
However, the current share price of around 500p has proved to be a key support level in the past. HSBC stock hasn’t fallen below 500p for any length of time since 2009. In my view, HSBC’s fundamentals also support the idea that now could be a good time to buy.
The bank’s shares trade at a 26% discount to their book value and have a 2015 forecast P/E of just 9.5. HSBC is expected to pay a total dividend of $0.51 per share for 2015, giving a prospective yield of 6.8%. In my view this valuation provides a good level of downside protection and suggests that for a long-term income investor, HSBC could be a smart buy.
Although computer problems have generated unwelcome publicity for HSBC in the UK this week, in my experience such issues rarely have a lasting impact on banks’ trading. What’s more important, I believe, is that HSBC’s financial health continues to improve.
The bank reported a common equity tier 1 (CET1) ratio of 11.8% at the end of September 2015. That’s up from 11.1% at the start of 2015 and well above the 10% level seen as risky by City analysts.
