In the long run, all companies encounter highly challenging periods. They can be due to external factors such as a weakening in demand for a particular product or a slowdown in the wider economy. They can also be caused by internal challenges, such as poor planning and a strategy which ultimately leads to disappointing top and bottom line performance.
Either way, it normally has a very negative impact on a company’s share price and, while the effects can be horrific for investors, it also presents a very appealing buying opportunity. That’s because if the company can either adopt a better strategy or the external factors improve, capital gains could prove to be very enticing.
One company which has endured a very tough period is AstraZeneca (LSE: AZN). Its problems have largely been its own making, with the company failing to develop sufficient new drugs and put in place a suitable pipeline to overcome the inevitable loss of patents on key, blockbuster drugs. Furthermore, it also failed to use its cash in the most efficient manner; favouring a share buyback programme ahead of investing in research and development capabilities.
The result has been a severe decline in profitability, with AstraZeneca’s earnings per share expected to be just 62% of their 2011 level when the company reports its 2015 full-year results. However, AstraZeneca appears to now be making all of the right moves through which to mount a successful comeback, with an ambitious acquisition programme breathing new life into the company’s pipeline.
Clearly, it will inevitably take time to post positive profit growth. However, it seems likely to do so over the medium term which makes it current price to earnings (P/E) ratio of 16.1 seem hugely appealing.
Similarly, Thomas Cook (LSE: TCG) has also endured a troubled past, with the company becoming a loss-making entity in the period 2011 to 2014. This had a disastrous impact on the company’s share price, with it falling to a low of 13p in 2012 and there being major concerns about whether it would survive its difficult trading period.
However, now that the economic outlook is improved Thomas Cook is moving from strength to strength. Today’s results show that the company has made its first annual profit in five years despite the negative impact on demand for its holidays caused by the terrorist incidents of recent months. And, with the winter season already being 58% sold, it appears to be well-placed to deliver continued strong performance moving forward.
Looking ahead, Thomas Cook is forecast to increase its earnings by 28% next year which, alongside a P/E ratio of 9.4, puts it on a price to earnings growth (PEG) ratio of just 0.3. This indicates that its shares have very appealing capital gains prospects – especially since the UK and European economies are showing signs of life and are set to benefit from a continued loose monetary policy in future years.