Shares in Argos and Homebase owner Home Retail (LSE: HOME) have fallen by 14% today after the company released a profit warning. It now expects full-year pretax profit to fall slightly below the bottom end of the £115m to £140m range which had previously been guided towards, with uncertainty surrounding its near-term sales figures being the key reason.
In fact, Argos is unsure about whether Black Friday will be repeated on the same scale as last year and, as such, is cautious about the potential impact it could have on its key Christmas trading period. Furthermore, Home Retail’s performance in the first half of the year was mixed, with Homebase posting strong sales growth and improved operating profit. However, Argos was less impressive and its top and bottom lines were negatively impacted by declines in both electrical and seasonal product categories.
Following today’s double-digit share price fall, Home Retail now trades on a price to earnings (P/E) ratio of around 12. This seems to be a fair price to pay for a company which is set to benefit from continued improvement in the outlook for UK consumers, with wage growth outpacing inflation for the first time since the start of the credit crunch. As such, today’s share price fall seems to be rather overdone and, while further short term volatility may remain, Home Retail appears to be a sound buy for the long run.
Similarly, Sky (LSE: SKY) also has capital gain potential. Its results released today were slightly ahead of expectations and show that the company is making encouraging progress. Operating profit in the first quarter of the year rose by 10% and, while sales in Italy declined by 4%, growth of 7% in the UK and Ireland as well as a rise in revenue of 11% in Germany fully offset this disappointment.
Looking ahead, Sky is forecast to grow its bottom line by 12% in the current year, which puts its shares on a price to earnings growth (PEG) ratio of just 1.4. This indicates that they offer growth at a reasonable price and, with Sky seeming to be successfully diversifying its operations as evidenced by the addition of 133,000 new broadband customers in the first quarter, it appears to be a strong buy at the present time.
Meanwhile, Vodafone (LSE: VOD) also has an encouraging outlook. It is due to increase its earnings by 21% in the next financial year which could have a hugely positive impact on investor sentiment. That’s because the investment community has come to see Vodafone as a quasi-utility which offers little in the way of earnings growth potential due to its considerable exposure to a slow-growing Europe. And, while dividends have been appealing in recent years, a clear catalyst for share price growth has been lacking.
However, with a step-change in its profit outlook combined with a PEG ratio of just 1.6, Vodafone appears to be at the outset of a purple patch which is likely to push its share price higher and reverse the 8% fall experienced in the last six months.