The markets recent declines have thrown up some great bargains.
Rolls-Royce (LSE: RR) andGlaxoSmithKline (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 ofmetrics.
Rolls shares plunged to a new five-year low this week as shareholders brace themselves for the companys first dividend cut in 24yearswhen 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 sheetafter five profit warnings in the past two years. Whats 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 companys aerospace earnings could grow by as much as20% 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, usingexcess capacity and ramping up production, are what ValueAct believes will makeRolls 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 doesnt leave much room for error if things dont 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 itwas 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 companys 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 companys shares have fallen by 6.3%, but this could offer an excellent opportunity for long-term investors.
Indeed, Glaxos 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. Glaxos shares currently trade at a forward P/E of 15.8.
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