Big news is expected as soon as this week for the shareholders ofJohn WoodGroup (LSE: WG), Morrisons (LSE: MRW) and Shire(LSE: SHP) is it time to buy their shares?
Job Cuts
A FTSE 250 oil and gas services firm, John Wood is reportedly expected to announce to have cut some 10% of its global workforce so far this year, or about 4,000 employees, when its interim results are due tomorrow.
More job cuts could ensue in this environment, in my view, which means that even assuming normalised revenues in the region of $6.5bn a year into 2017, its 5.7%/5.6% forward operating margin could rise at a faster pace, yielding a stronger earnings per share profile for the enterprise.
This could render John Woods relative valuation cheaper than it currently is at 14x forward earnings,based on its price-to-earnings (P/E) ratio.With a price-to-book ratio just above 1x, and a forward yield in the region of 3.4%, its shares do not seem to be expensive, to be honest particularly because its balance sheet is strong.
If its operating cost base is properly managed, investment risk could be limited indeed.
ConvenienceStores
There is fresh speculation that the food retail sector is about to face a new wave of price cuts, and that Morrisons could sell its convenience stores neither of which is great news for Morrisons.
Morrisons is in advanced talks to offload its convenience stores to the investment firm that orchestrated a dramatic rescue of Monarch Airlines, The Telegraph reported on Saturday, adding that the buyer,Greybull Capital, could save the stores, most of which do not make their cost of capital.
What this means for shareholders is unclear.
Convenience stores are one way to preserve market share, and although they may be a loss leader at group level, its hard to see how Morrisons could be better off without them. Moreover, proceeds from a sale will unlikely be meaningful, and even assuming that the stores are valued at 0.5x sales, Morrisons should fetch only between 100m and 200m.
That said, If Morrisons continues to shrink, it could be taken over. Based on several metrics, its stock is not a steal at 180p but is not expensive, either yet there are more solid alternatives in this market.
Such as Shire, for instance.
M&A Talk
Baxalta stock rose 3% on Friday, and market talk is that Shire is about to announce a blown-out offer in the region of $50 per share for its US biotech rival in order to secure thebacking of Baxaltas board.
So many things could go wrong with the deal that recent weakness in Shires valuation could represent a great opportunity to snap up its shares. As Iexpected, Shires stock price has been under pressure ever since the group announced it would go hostile in early August but just how likely is Shireto offer a 60% premiumagainst Baxaltas unaffected share price?Very, the bears argue.
Such an outcome remains a distinct possibility, but if the deal is swiftly done at between $45 and $50 a share, Shire stock could be a good opportunity right now.Most likely, however, negotiations will drag until the end of the year, which heightens the risk associated to its shares.
On the face of it, Shires management has shown a good degree of discipline in M&A during the years, and I doubt theyll offer any amount to wrap up the acquisition of Baxalta, although the strategic logic behind the tie-up is compelling.
That said, you may want to hold thetrigger on Shire. Then,you could eye a small-cap pharma stockwhose financials and track record point to bigger upside over the short & long term!
This 300m company could doublerevenue and core cash flows by 2017, and for that growth profile you’d be payinga lowly forward P/E multiple in the mid-teens.
It’s your call, ofcourse, but our FREE report could help asses the prospects of a truly appealing value play, in my view.So,get your FREE copy right now: it comes without further obligations, but it is completely free only for a limited amount of time!
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.