A costly settlement

Aerospace group Cobham (LSE: COB) has been under a cloud since July when it revealed US customer Boeing was claiming damages relating to their KC-46 air-to-air refuelling tanker programme.

Cobham initially pencilled in a £40m charge relating to these problems, but today announced a further £160m of expected costs to achieve a final settlement. This is made up of an £86m payment to Boeing and £74m of extra costs to complete the programme.

Although this settlement is bigger than expected, Cobham shares edged higher today as investors welcomed the certainty it provides. The company can now move on and focus on its return to growth.

+30% in 2019?

Cobham’s settlement with Boeing will make a hole in the firm’s 2018 results. But with that bad news behind it, the picture looks much brighter for 2019.

City analysts’ forecasts suggest that if we ignore one-off costs like the Boeing settlement, Cobham’s earnings will rise by 30% in 2019. They’re also forecasting a return to dividend payments this year, although there’s a risk that today’s news could delay that decision.

Barring any other surprises, I think Cobham could deliver steady growth over the next few years. Although the shares don’t look cheap on 18 times 2019 forecast earnings, this ratio could fall rapidly if profit margins continue to improve. I rate the shares as a hold.

Power up for growth

Temporary power solutions provider Aggreko (LSE: AGK) makes money from renting out large generators to event operators, remote engineering sites and utility operators. It recently signed a deal to provide power for the 2020 Tokyo Olympics, for example.

The company’s growth ground to a halt back in 2012, since when the shares have fallen by nearly 70%. But this is still a large and profitable business, and City forecasts suggest profits may finally start rising again in 2019. As I’ll explain, I think the firm’s shares are starting to look too cheap to ignore.

A tempting valuation

I’ve been watching Aggreko for a while and am increasingly tempted to buy some for my own portfolio. During the first nine months of last year, underlying revenue rose by 11%. This figure strips out the impact of exchange rates and fuel costs that are passed on directly to customers, so it’s a useful guide to growth.

The last remaining drag on the business is the group’s Utility division, where hire demand is falling. However, this should be manageable and will reduce the group’s exposure to high-risk countries such as Zimbabwe and Argentina.

Chief executive Chris Weston expects pre-tax profit to be flat in 2018. City analysts reckon that this performance is likely to be followed by a 5% increase in earnings in 2019.

The shares currently trade on 14 times 2019 forecast earnings and offer a 3.8% yield. If Weston can return the business to growth this year, then I think the shares could perform well from this level.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Smiths

Management said that breaking off Smiths Medical should allow the remainder of the group “to concentrate on growing as an Industrial Technology group, united by shared business characteristics and a common operating model.”

This should have the further benefit of freeing Smiths Medical to deliver on its full potential and capitalise “on its leading positions, large programme of new product launches and to exploit value creating opportunities in its rapidly changing market,” although investors will have to wait until its interim results in March to hear more.

Stretch out and wait

The group also published a first quarter trading update today that reported expectations for the year remain unchanged.

Investors in Smiths need something to feel less miserable about, with the stock down 22% over the past six months and trading 5% lower than five years ago. The medical devices and equipment division has done particularly poorly, having been hit by regulatory and contract challenges (now abating), but previous attempts to offload it floundered. At least it remains on course to grow in the second half.

Well I wonder

Its John Crane arm continues to show “good growth” with an acceleration in orders and further strong aftermarket demand. Smiths Detection expects a strong second half, supported by a robust order book, while Smiths Interconnect and Flex-Tek are growing well.

Investors are banking on the fact that the break-up of the £5.5bn FTSE 100 business will unlock value. Earnings growth has been patchy for years, while revenues have grown only slowly. Despite recent woes, there’s no discount with the stock trading at 14.9 times earnings, with a forecast yield of 3.3%, and cover of 2.1. One for your watch list, though.

Boeing, Boeing, gone

Aerospace and defence group Cobham (LSE: COB) is down around 2% today after publishing a trading statement for its first 10 months that was as expected, while it “continues to make progress in executing its turnaround programme.”

Underlying operating profit in Mission Systems and Communications and Connectivity was stronger, offsetting weaker performances in Advanced Electronic Solutions and Aviation Services.

The FTSE 250-listed group’s biggest headache is its KC-46 aerial refuelling tanker programme for Boeing. The US aviation giant is claiming as yet unquantified damages from Cobham, and is withholding payments of its invoices.

Damaging

Today, Cobham said it has delivered a total of 18 production-standard Centerline Drogue Systems under its KC-46 programme, adding that “qualification of the Wing Aerial Refuelling Pods remains in its early stages with risks relating to schedule and cost.” Discussions with Boeing continue regarding its “unquantified damages assertions and payment withhold,” so there’s no clarity for investors here, which hasn’t helped the share price.

Management anticipates “significant trading activity” in the final two months, but it’s hard to construct a buy case with the stock trading at a pricey 21.6 times forecast earnings (despite falling 48% in three years), and yielding just 0.6%.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m not too concerned. In my view, Wednesday’s numbers were a useful reminder of why this company has not cut its dividend for 19 years. Today I’m going to explain why I think this excellent performance should continue.

3 big advantages

In my view, this industrial group’s advantages can be boiled down to three key factors.

Size and diversity: BAE has a market cap of £20bn and five distinct operating divisions — aircraft, shipbuilding, electronics, cyber intelligence and vehicle development.

Each of these divisions is large enough to be a sizeable company in its own right. The group received £9.7bn of new orders during H1, lifting its order backlog by £1bn to £39.7bn. This is a long-term business.

Cash generation: A second attraction is that the group tends to create a lot of cash. In 2017, BAE generated free cash flow of £1.3bn from an operating profit of £1.5bn. That’s an excellent rate of cash conversion.

Although Wednesday’s figures showed a half-year cash outflow of £436m, this relates to the ramp-up of some major new projects and is fairly routine. I don’t see this as a concern.

Valuation: BAE shares are no longer priced at bargain levels. But the stock’s valuation still looks very reasonable to me.

The shares trade on 14.6 times forecast earnings, with a prospective dividend yield of 3.6%. Analysts are pencilling in earnings growth of 9% for 2019. This would put the stock on a P/E of 13.6.

A long-term buy?

I don’t expect BAE’s share price to rocket higher. Slow and steady progress seems more likely to me, helped by inflation-beating dividend growth.

I view this stock as a long-term buy-and-forget one, where all you need to do is reinvest or withdraw your dividend payment twice a year.

Could this FTSE 250 stock outperform?

If you’re looking for a business with the potential to deliver more rapid growth, there are a number of smaller rivals to BAE in the FTSE 250. One of these is aerospace and electronics group Cobham (LSE: COB).

This £3bn business is still in turnaround mode, following a series of problems a few years ago. Cobham published its half-year results on Friday, prompting a 4% rise in the group’s share price.

Unfortunately I think Friday’s gain was more of a relief rally than a celebration. Problems remain.

Boeing won’t pay Cobham’s’ bills

Cobham’s biggest problem is the KC-46 aerial refuelling tanker programme on which it’s working with Boeing. The US aviation giant is claiming “as yet unquantified damages” from Cobham relating to its work and is withholding payments of its invoices.

Regulatory approval for some parts of Cobham’s KC-46 system also seems to be taking longer than expected, and today the firm said it was allocating an extra £40m to this troubled project.

A turnaround buy?

The company says that it remains on track to deliver full-year profits in line with expectations. But in my view the risk of a profit warning later this year is rising.

Cobham could be a profitable turnaround buy. But with a 2018 forecast P/E of 26, I don’t think the shares are cheap enough to reflect the risks facing investors.

Although earnings are expected to improve in 2019, I don’t feel confident enough to bet on this.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Over the short term, the name of the game for BAE is cash flow improvements as the company retrenches following several years of trimmed defence budgets in the West while it waits for increased spending from the likes of the US to flow through into its income statement. That can take a while due to procurement processes. Last year the company met with considerable success in this area as its operating business cash flow rose over 70% from £1,004m to £1,752m even as sales only rose by 3.1% to £19,626m.  

As new orders begin to roll in from increased defence budgets in the US, Europe and the Middle East, more streamlined operations will be hugely beneficial for margins and cash flow. This is good news both for earnings and for the group’s already considerable dividend that yields a solid 3.55% annually.

This is especially true as the balance sheet is in increasingly good health, which should help management boost shareholder payouts. At year-end, the group’s net debt position had fallen to £752m from £1,542m year-on-year while its pension deficit decreased from £6,100m to £3,900m.

With global defence spending due to rise by over 3.3% in 2018 according to IHS Jane’s, BAE is in a great position. And with increased focus on cash flow already paying off, I see good scope for management to boost profits ahead of revenue over the medium term. Add in a hearty dividend yield and this leads me to believe BAE is a bargain at its current valuation.

Early signs of a turnaround 

This is in stark contrast to fellow defence contractor Cobham (LSE: COB), which is still recovering from a years-long acquisition binge that the new management team is currently struggling to unwind.

The company’s AGM trading update released this morning showed the group is making progress, but there remain several significant issues still facing the company. Chief among these has been repairing the heavily-indebted balance sheet. Progress has been made, with a £500m rights issue last year as well as the recent sale of its test and measurements business for $455m. These moves have staved off fears of breaching debt covenants.

However, management warned this morning that operational improvements will take longer to fix and that it expects “limited cash generation in 2018.” This is hardly a surprise given management had previously warned as much, but investors hoping for a quick turnaround will need to be more patient.

For now it appears Cobham’s new CEO is making good progress on cutting unprofitable contracts, streamlining operations and repairing the balance sheet. If he can pull this off while also profiting from rising defence budgets, Cobham could yet be an interesting turnaround. But for now there are too many question marks for me to invest in a company with a long track record of poor performance.  

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With that in mind, here are two shares which have experienced troubled recent pasts. Their valuations are exceptionally low and could suggest that there is capital growth potential on offer for the long run.

Difficult period

Reporting on Friday was supplier of industrial chains and related power transmission products Renold (LSE: RNO). The company’s performance since the start of October 2017 has been disappointing, with raw materials prices continuing to increase. While there has been some success in passing those costs on to customers, the realisation of these price increases has been slower than expected.

Alongside a weaker US dollar, this is putting pressure on the reported results from the company’s North American business units. As such, reported revenues are now expected to rise by 5% for the current financial year. Adjusted operating profit is due to be below previous expectations, and slightly below the reported adjusted operating profit for 2016 and 2017.

In response to its profit warning, Renold’s share price has fallen by over 15%. In the short run, a further decline in its valuation could be ahead. However, in the long run the stock appears to offer a wide margin of safety. For example, it trades on a price-to-earnings (P/E) ratio of around 8, which suggests that it could deliver improving performance. And while potentially volatile, the rewards on offer over the long run could be significant.

Return to form

Also trading on a low valuation at the present time is aerospace and defence company Cobham (LSE: COB). It has experienced a hugely challenging period which has seen profit warnings and declines in its bottom line. This has been at least partly due to difficulties in the global defence sector, with government spending reductions creating sizeable headwinds for industry operators.

Now though, Cobham seems to be on the cusp of improved financial performance. Its bottom line is due to return to growth next year after a five-year period where its earnings have moved 70% lower on a per share basis. The company’s earnings are expected to grow by 23% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.8.

Clearly, there is no guarantee that the company will be able to deliver on its upbeat forecasts. However, with an improving industry outlook and the potential for rising profitability under a refreshed strategy, the prospects for the business seem to be sound. Therefore, it would be unsurprising for its share price to continue to move higher after its rise of 12% during the last month.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Cashing out

The 200-year-old company has struggled lately but management said today’s much improved results are laying strong foundations for the future with continued progress across all three divisions. Group revenue jumped 17% on a reported basis and 10% on an organic constant currency basis. Profit before tax stood at £57m, turning around last year’s loss of £122.3m.

This is nice, but of no use to anybody who does not already hold the company’s stock as the board also announced it has reached agreement on the terms of a recommended cash acquisition of Laird’s entire issued and to-be-issued ordinary share capital.

Shareholders are to receive a highly generous 200p in cash for each Laird share held, representing a premium of approximately 72.6% to yesterday’s closing price of 115.9p. This has driven Laird’s shares to 202.6p. It’s too late, but don’t despair as there are always more opportunities out there, like this high-flyer.

Sky high

Defence and aerospace engineer Cobham (LSE: COB) is putting on a show today, its share price soaring 15% on publication of its preliminary results for the year ended 31 December. It needed some good news like this, its share price is still trading 55% lower than it was three years ago.

Management struck a bullish tone from the off by hailing an encouraging first year of turnaround, with increased focus, reduced risk, and a more resilient balance sheet. My Foolish colleague Kevin Godbold saw this coming months ago.

Highlights included a 6% rise in revenue although this was mostly due to favourable currency translation, with organic revenue growth of just 1%. Underlying operating profit of £210.3m was slightly ahead of expectations. Cobham also reported strong free cash flow generation as a result of management focus, later phasing of 2016 onerous contract cash flows, lower capital expenditure and £27m of advance customer receipts.

Risks and rewards

Cobham is also progressing delivery on its 2016 onerous contracts, including KC-46, although it says risks and challenges remain. Best of all it has a more resilient balance sheet, with year-end gearing ratio at 1.3 times and US$545m revolving credit facilities refinanced for five years or more. The agreed divestment of AvComm and Wireless test and measurement will bring in US$455m cash. It will also increase focus, reduce risk and further strengthen the balance sheet.

Last month my Foolish colleague Roland Head was warning of the many dangers posed by this turnaround stock and the sky is not completely clear. Earnings per share growth has been negative for years, with City analysts forecasting another 1% drop in 2018, but then a 23% rise in 2019. I only wish Cobham was cheaper, but it trades at a pricey-looking 22.4 times forecast earnings. Buckle up: the ride could be bumpy but ultimately rewarding.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’m beginning to feel that way about defence and aerospace engineer Cobham (LSE: COB), whose shares fell by 4% on Friday morning. The trigger for the fall was a statement announcing a deal to sell the group’s AvComm and Wireless test and measurement businesses to a US buyer for $455m.

I estimate that the sale price is equivalent to perhaps 16-18 times earnings, which seems reasonable. My concern is that this sale is another sign of Cobham’s troubled financial situation. I think there could be more bad news to come.

Why I’m worried

Today’s announcement highlighted two main areas of concern, in my view. The first is that the sale of these firms will reduce the group’s underlying operating profit margin, as they were more profitable than Cobham’s other businesses.

The proceeds from the sale will be used to repay £440m of debt. Doing this will reduce interest costs by around £18m per year, offsetting most of the £25m operating profit these units generated last year. By selling now, Cobham can also avoid the need for future investment in areas which it says are non-core.

However, what disturbs me is that CEO David Lockwood may simply be clearing the decks for another round of exceptional costs. Today’s statement reminded investors that the company still faces “some significant contract exposures and other contingent liabilities”. The full scope of these isn’t yet known, but the wording of today’s news sounds worrying to me.

Cobham shares now trade on a 2018 forecast P/E of 20. The group continues to face unknown liabilities and today’s disposals seem likely to slow earnings growth, at least in the short term.

In my view this stock isn’t cheap enough to reflect the risks. I’m going to avoid this troubled business for a little longer.

A 7.5% yielder I’d buy

In contrast, budget card and giftware retailer Card Factory (LSE: CARD) looks increasingly tempting to me. The group’s shares slumped recently after it warned that full-year profits were likely to fall by around 5% this year.

The slowdown is blamed on the impact of wage inflation and foreign exchange costs, which are expected to total £7-8m in the 2018/19 financial year. Sales performance has also weakened, with card sales apparently flat and sales growth being driven by low-margin non-card items.

This all sounds a bit bleak, but it’s worth remembering that this is still an unusually profitable retailer, with an operating margin of 20% and very little debt. Cash generation is still strong and forecasts for the current year suggest that earnings will edge 21% higher to 19.1p per share in 2018/19.

Given the group’s limited spending requirements, I think this could be enough to support an expected dividend of 14.5p per share. At current prices, this would give the stock a dividend yield of 7.5%.

Card Factory’s share price could continue to drift lower as investors seek new growth opportunities. But the group’s underlying business still looks healthy to me. For income investors, I believe this could be a profitable buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

However, there is still some way to go until the bank returns to full financial health. Historic issues continue to hurt its overall performance, while investor sentiment remains held back by the uncertainty it faces. In the long run though, the company could be a top turnaround stock due to its potential for high growth in earnings.

Recovery prospects

As with any recovery stock, RBS has experienced a period of difficult financial performance. Its bottom line has remained generally in the red in recent years at the same time as many of its sector peers have posted improving levels of profitability. This is partly reflective of the scale of challenges the company faced during the financial crisis, and the impact they have continued to have even in recent years. Additionally, the strategy pursued by the company may not have been as successful at improving efficiencies or changing its risk profile, as has been the case elsewhere within the sector.

Looking ahead, RBS is forecast to return to impressive levels of profitability in the next two years. It is due to deliver a pre-tax profit of £2.9bn this year, followed by a rise of around 6% next year to £3.1bn. This puts the stock on a forward price-to-earnings (P/E) ratio of just 10.6, which suggests that it offers a wide margin of safety. This could mean its upside potential is high – especially since dividend growth prospects are also impressive. It is due to yield 3.3% next year from a shareholder payout which is expected to be covered 2.9 times by profit.

Turnaround potential

Of course, RBS is not the only stock with high growth potential. Reporting on Wednesday was aerospace and defence company Cobham (LSE: COB). It has released a number of profit warnings in the past, but trading in the current year has generally been as expected. The company is seeking to build the foundations for future growth through the resolution of onerous contracts, as well as concentrating on simplifying its business and improving the customer proposition.

Cobham’s future prospects are uncertain, given that it is in the process of attempting a major recovery process. However, it is expected to report a rise in its bottom line of 14% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.5, which suggests that it could offer impressive capital growth potential.

While its share price and that of RBS may remain volatile and the two companies could have uncertain outlooks, they could also deliver surprisingly high levels of capital growth in the long run.

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Peter Stephens owns shares in RBS. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The firm is restructuring, yet again, and moving further towards its customer-facing operations of supplying gas, electricity and associated services. The directors plan to reallocate £1.5bn of resources from asset businesses to customer-facing businesses by 2020. But the market is fierce with competition from smaller energy suppliers warming up, presenting the average gas and electricity consumer with more and more choice, which is easily accessible through price comparison websites.

Difficult trading

However, it seems clear that the company needs to do something because net cash flow from operating activities plunged almost 19% in the half-year to June, compared to the figure a year previously. Meanwhile, the whole energy sector faces political noises about tightening regulation, while the warm autumn weather we’ve seen in Britain will be driving Centrica’s management accounting department to hurl its previously drawn up cash flow projections into the bin.

The firm is making some progress reducing debt but it’s also in a state of operational and strategic flux at the moment. It’s difficult to predict what shape it will emerge at the other end of the restructuring period and whether the business will be worth holding shares in. Maybe that’s why the share price is still sinking, and whatever the valuation or level of dividend yield on offer, I’m not willing to plunge in to buy any of Centrica’s shares yet.

I’d rather focus on the emerging recovery story at battered aerospace and engineering firm Cobham (LSE: COB).

The fall in earnings could be over

After five years of shrinking earnings, the firm’s fortunes could be set to improve during 2018, and City analysts following the firm predict a lift in earnings per share of around 14%. Unlike Centrica, Cobham’s share price looks steady and isn’t falling anymore. Such base building could signal that better times are on the way for the share price, and I’m looking out for the next trading update – due during November.

Back in August, within the half-year report chief executive David Lockwood told us that the firm is “working hard to build the foundations for our future success, but we are in the early stages of implementing a challenging turnaround…”  He reassured us that Cobham operates several high-quality businesses with differentiated technologies and leading positions in attractive markets.

An ‘off-the-peg’ recovery plan

There’s nothing unusual in the directors’ plan for recovery. It’s all about getting the basics right by focusing on costs, customer service, leadership, control and execution – the staples of just about every successful business turnaround. Lockwood reckons the company is making progress “across a number of areas” but warns that executing all the required steps will be “time-consuming and may encounter some turbulence along the way.” 

Nevertheless, the firm delivered results in line with expectations during the first half of the year with operating profit of £89.9m, down 12% or so, compared to the year before. If you think Cobham can recover, it could be a good time to look at the investment opportunity right now.

The post Why I’d dump Centrica plc for this turnaround stock appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

My first pick for today is aero engineer  Cobham (LSE: COB), which looks like it’s finally emerging from a truly dire spell. Its shares had slumped after four straight years of falling earnings, but so far today we’ve seen a 5.5% gain on the back of first-half results, to 141.5p.

There’s a 23% fall in earnings forecast for this year before a predicted return to growth in 2018, and a drop in first-half adjusted EPS from 3.8p to 2.5p reiterated the likelihood of that, especially with adjusted operating profit down 12% to £89.9m.

But that’s pretty much in line with expectations, as chief executive David Lockwood pointed out that the company is “in the early stages of its turnaround and there remains a wide range of potential outcomes for 2017.“

Cash turnaround

Cash had been tight, and a rights issue in May raised £479m. Add to that a cash conversion ratio of 120% in the half, which saw free cash flow rise by 20% to £64.6m, and we’re looking at a net debt-to-EBIDTA multiple dropping from 2.3 times a year ago to a much more manageable 1.5 times.

As expected, there is to be no dividend this year, and there will be none paid until “it is prudent to do so.” That’s exactly the right approach just now, when efficiency, savings and cash retention are of utmost importance.

After a year in which Cobham shocked investors with massive writedowns (including a £150m impairment over its flight refuelling contract with the US Air Force), I really do think we’re finally seeing light at the end of the tunnel.

There’s still some significant risk, certainly, but I reckon Cobham’s recovery prospects outweigh it — and I’d buy.

Cheap pharma

Another bombed-out stock that has crossed my radar is Hikma Pharmaceuticals (LSE: HIK), whose earnings dropped in the past two years and whose share price has crashed by 47% in the past 12 months, to 1,409p.

The company got a big knock-back from the US Food and Drug Administration, which declined to approve its generic asthma treatment, VR315, intended as competition for GlaxoSmithKline‘s Advair Diskus.

VR315 has not actually been rejected, and there’s still a chance for it. But the harsh reaction to the FDA’s response is not surprising, as VR315 could be very lucrative for Hikma (and for Vectura, from whom Hikma licenses the powder formulation it uses).

Attractive prospects

But even without VR315, Hikma has an impressive array of treatments in its arsenal (the firm sells more than 700 products worldwide) and, I think, a very promising future. And I do think the share sell-off has been overdone.

There’s now an 8% drop in EPS forecast for the current year, but a 24% upturn suggested for 2018 would drop the P/E to under 14. Dividends look set to yield under 2% this year and next, but they’re nicely progressive and very well covered by projected earnings — if 2018 predictions come off, we’d be looking at cover of four times.

And we shouldn’t write off that VR315, as a new amended application for FDA approval will be in the pipeline — though it will probably take around 12 months. But we should see that as a bonus — even as it stands now, Hikma looks like a buy to me.

The post These 2 battered stocks look set for a return to growth appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.