The market’s recent declines have thrown up some great bargains.
Rolls-Royce (LSE: RR) and GlaxoSmithKline (LSE: GSK) were already cheap before the sell-off began earlier in the year. But recent declines have only depressed their valuations and now they look more attractive than they have done for several years on a number of metrics.
Dividend concerns
Rolls’ shares plunged to a new five-year low this week as shareholders brace themselves for the company’s first dividend cut in 24 years when the aero-engine maker reports annual results on Friday. Management warned back in November that the payout was under review, and City analysts are expecting a 30% cut as the group seeks to strengthen its balance sheet after five profit warnings in the past two years. What’s more, there have been concerns that Rolls will announce a sixth profit warning this Friday when the company reports its results for 2015.
However, Rolls’ long-term outlook is more positive. For example, US hedge fund ValueAct Capital, which has taken a stake in Rolls, believes that the company’s aerospace earnings could grow by as much as 20% per annum through 2020 as orders are filled and new engines developed. Aerospace accounts for 80% of Rolls’ earnings before interest and tax. Cutting costs, using excess capacity and ramping up production, are what ValueAct believes will make Rolls’ earnings grow strongly over the next four years.
Rolls’ management has promised to bring down costs by up to £200m from 2017, on top of a planned £115m reduction, in an attempt to boost profitability and cash generation.
That said, at present levels Rolls’ shares trade at a year-end 2016 P/E of 20.5 according to analysts’ predictions, which doesn’t leave much room for error if things don’t go to plan. With that being the case, Rolls might not be suitable for risk-averse investors.
Ahead of target
At the beginning of February, Glaxo announced its full-year results for 2015, which met expectations. Sales rose 4% to £23.9bn while core net profits, which exclude some exceptional items, were £3.7bn, or 75.7p a share.
Alongside the results, Glaxo also announced that it was on course to meet its target for earnings to increase by a double-digit percentage this year as rising sales from new products begin to outweigh declines in the company’s best-selling Advair asthma drug. Moreover, the company estimates that it will now generate £6bn in annual sales from new medicines two years ahead of target.
Unfortunately, it seems as if the market has just ignored these results from Glaxo. Since the announcement, the company’s shares have fallen by 6.3%, but this could offer an excellent opportunity for long-term investors.
Indeed, Glaxo’s outlook is now more attractive than it has been for a long time. The company is set to return to growth this year, and the dividend yield of 5.9% is safe for the time being. Glaxo’s shares currently trade at a forward P/E of 15.8.