Today I’m going to look at two stocks which have repeatedly disappointed investors over the last few years. I’ll explain why I think the tide may finally be turning and whether the outlook supports a buy rating for each stock.
Powering up
Temporary power group Aggreko (LSE: AGK) has lost 64% of its market value since 2012, despite a number of false dawns. But I believe a sustainable recovery may now be on the cards.
Aggreko’s revenue rose by 2% during the first quarter, excluding the impact of currency and pass-through fuel costs. Excluding losses from the group’s Argentinian business, revenue rose by 7% on a constant currency basis excluding fuel.
Ongoing losses in Argentina are the result of Aggreko renewing legacy contracts dating from 2008 onto new, lower rates that reflect current market conditions. The upshot of this for Aggreko seems to be that some of its equipment in Argentina is coming off hire, and some contracts are continuing with lower profit margins.
The good news is that the firm says the Argentinian contracts are “the last significant legacy contracts” that should be affected by this problem. These exceptional losses should clear the way for Aggreko to return to earnings growth in 2018.
However, market conditions suggest growth is unlikely to be as rapid as it once was. Today’s statement revealed that while conditions are improving in the US oil and gas market, “Asia and Latin America continue to be more challenging”. Aggreko is downsizing its business in these regions in order to manage costs.
Today’s quarterly statement confirmed that full-year results should be in line with expectations. That means earnings per share are expected to fall slightly to 60.7p per share, putting the stock on a forecast P/E of 14.9. The dividend is expected to remain broadly unchanged at 27.4p, giving a forecast yield of 3.0%.
It’s too soon to be sure, but I believe Aggreko’s downturn may now be close to its low point. If the firm can deliver steady growth from here and maintain good cash generation, I believe the shares could be attractive at around 900p.
No more profit warnings
Defence group Cobham (LSE: COB) became notorious last year for the number of profit warnings it issued. But the group said on Thursday that first-quarter trading had been in line with expectations and that full-year guidance remained unchanged.
That should be good news for shareholders, who recently took part in a £512.4m rights issue to help the firm reduce its debt burden.
It has to be said that Cobham does not look like an attractive buy based on its recent performance. But new chief executive David Lockwood is confident he can drive through significant improvements to operational and financial processes. He believes he should be able to increase the group’s underlying operating margin by 2-3%. This could certainly lift profits to more attractive levels.
Cobham has the potential to be a successful turnaround play. But I think it probably makes sense to wait for the firm’s interim results in August before deciding whether to invest. I certainly won’t be buying shares before 5 May, when the share price is likely to lurch lower as the new rights issue shares begin trading.
