Having fallen by 20% in less than six months, the Rolls-Royce (LSE: RR) share price could offer recovery potential. The company has faced an uncertain period regarding the world economy which may persist during the course of 2019. However, it appears to be putting in place a sound strategy, while its valuation suggests that a margin of safety is now on offer.
As such, now could be the right time to buy it. However, not all falling shares could offer the same recovery appeal, with a profit warning sending one stock down as much as 30% on Tuesday.
Challenging outlook
The company in question is veterinary services group CVS (LSE: CVSG). It released a profit warning, with higher staff costs and challenging performance being recorded in its recently-acquired practices in The Netherlands. As a result, the company expects to announce EBITDA (earnings before interest, tax, depreciation and amortisation) for the first half of the year that are flat compared to the same period of the previous year.
The company has identified a number of cost-saving opportunities which are expected to have a positive impact on its efficiency over the medium term. It is also re-evaluating the prices it is willing to pay for potential acquisitions.
Clearly, CVS is experiencing challenging trading conditions. Investor sentiment appears to have declined significantly following its profit warning. As such, it may be prudent for investors to hold off purchasing its shares, and instead wait for positive news to emerge regarding the impact of the plans that it is set to put in place over the medium term.
Recovery potential
The decline in the Rolls-Royce share price could be reversed over the medium term. The company is putting in place a revised strategy that could lead to it being more efficient and capable of adapting to the change which is almost inevitable across the defence and civil aerospace sector. Investment in new products is likely to expand its global reach, and this could boost its financial performance over the coming years.
With the stock now having a price-to-earnings growth (PEG) ratio of just 0.3, it could offer a wide margin of safety. Certainly, a number of other industrial shares also trade on low valuations, but the diverse nature of the company’s business may make it more appealing over the long term. That’s especially the as since there is expected to be strong growth in a number of its key markets.
While Rolls-Royce’s shares may be impacted negatively in the short run by possible threats to the world economy, its strategy appears to be sound. It seems to have an improving position in a number of growth segments, and they could catalyse its financial performance. At a time when the uncertain prospects for the FTSE 100 mean that it is struggling to find direction, the stock could be a relatively appealing investment opportunity.
