Today’s update from soft drinks producer Barr (LSE: BAG) is rather mixed. On the one hand, the seller of Irn Bru expects results for the full year to 31 January to be in line with market expectations. However, on the other hand it reported highly challenging trading conditions in recent months that could continue into the next financial year.
For example, revenue in the fourth quarter of the year is expected to have increased by 2.5% versus the same quarter last year. Although positive, that’s around half the growth rate it reported a year ago and comes at a time when Barr is experiencing increased competition. In response, it’s seeking to manage costs more effectively and make efficiencies, with margins being in line with expectations.
Looking ahead, Barr is confident in its ability to successfully navigate the difficult market conditions that it faces. But with investor sentiment being weak following a share price fall of 16% in the last year, Barr’s price-to-earnings (P/E) ratio of 18.9 looks overly generous given its outlook.
Watch and wait?
Also posting share price declines in the last year is Whitbread (LSE: WTB), with the Premier Inn and Costa Coffee operator recording a share price decline of 21% during the period. A key reason for this is the uncertainty regarding the company’s future cost base, which is set to rise significantly as the living wage comes into being. With a large number of Whitbread’s staff being paid hourly, it could have a major impact on margins moving forward.
Of course, Whitbread is hoping to pass on the additional costs to consumers, but this may not work. Premier Inn is a budget hotel brand and it may lose ground compared to cheaper alternatives, while Costa Coffee may also see its sales come under pressure if prices rise too quickly. With Whitbread trading on a price-to-earnings growth (PEG) ratio of 1.5 it does hold appeal, but may be worth watching rather than buying.
Turnaround potential
Meanwhile, HSBC’s (LSE: HSBA) share price has continued to fall in 2016 after a disappointing 2015. It’s now down by 20% during the two periods and further falls are very realistic in the short run. That’s because Chinese growth rates are continuing to fall and with HSBC having a major exposure to the Asian economy, investor sentiment could come under further pressure.
However, in the long run HSBC has considerable turnaround potential. That’s because, as China becomes a more consumer-focused economy, its demand for credit will increase. And with HSBC being in a prime position to offer credit, its bottom line could soar. Furthermore, with HSBC recently reporting that its cost saving initiatives are on track, its financial outlook is set to improve. With its shares trading on a P/E ratio of only 9.7, there’s tremendous upward rerating potential.