The turnaround kid

With Rolls-Royce (LSE: RR) being at the beginning of its own turnaround story, many investors are interested in buying a slice of the engineering company. This seems to be a logical move since Rolls-Royce has an excellent management team, is financially sound and has the potential to benefit from a growing aerospace market in particular.

The problem, though, is that Rolls-Royce appears to be rather expensive at the present time. For example, it trades on a forward price-to-earnings (P/E) ratio of 19.5, which indicates that its shares could continue to come under severe pressure even after their fall of 34% since the turn of the year.

And with the company’s bottom line due to fall by 20% this year and by a further 43% next year, 2017 could see further losses being reported. As such, it may be prudent to wait for either a lower share price or an improved outlook before piling in to Rolls-Royce.

Good times ahead?

Also set to have a difficult year is Royal Mail (LSE: RMG). Its bottom line is forecast to decline by 20% in the year to the end of March 2016 and while its shares have risen by 3% in 2015, they could come under pressure in the coming months as the market prices in the expected disappointment from a net profit decline.

However, Royal Mail also offers excellent upside potential in 2016 and beyond, with the 2017 financial year set to deliver a rise in the company’s earnings of 10%. With Royal Mail trading on a price-to-earnings growth (PEG) ratio of 1.2, this upbeat growth potential does not yet appear to be priced-in, which means that its capital gains could be very impressive by the end of 2016.

In fact, if Royal Mail were to rise by 25% next year, it would still trade on a P/E ratio of 14.8 which, for a company that offers double-digit earnings growth potential, does not appear excessive.

Stability play

Meanwhile, National Grid (LSE: NG) continues to offer one of the most consistent and reliable growth outlooks in the FTSE 100. While its shares trade on a P/E ratio of 15.2 and offer little in the way of strong earnings growth prospects over the next two years, National Grid’s income appeal remains very high.

For example, it currently yields 4.8%, which is around 20% higher than the FTSE 100’s yield. Plus National Grid offers much greater resilience than the wider index during challenging economic circumstances. The index has a relatively large exposure to the resources sector and the financial services sector, both of which could prove to be volatile in 2016. In fact, with a beta of 0.75, National Grid clearly offers a less volatile shareholder experience than the wider index.

If National Grid’s share price were to rise by 25%, it would still yield 3.8% and continue to offer a more robust outlook than the majority of its peers. Therefore, if US interest rate rises hurt investor confidence next year and the Chinese economic slowdown gathers pace, National Grid could become more in demand and its shares could easily be bid up by 25% or more.

The post Will National Grid plc, Rolls-Royce Holding PLC And Royal Mail PLC Rise By 25% In 2016? appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Peter Stephens owns shares of National Grid and Royal Mail. 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.

If the firms he’s holding deliver decent investor total returns, it will be because they stand on their own merits and achieve advances by hard-earned business growth, operational efficiency, and effective execution of their strategies.

Today, I’m looking at three firms featured in the top twenty largest holdings of the CF Woodford Equity Income Fund: Rolls-Royce Holdings (LSE: RR), Next (LSE: NXT) and Royal Mail (LSE: RMG).

Pushing for a resilient and sustainable business

Aircraft engine manufacturer Rolls-Royce Holdings is in the middle of what the chief executive calls a significant transition from mature engines to newer, more fuel efficient ones, such as the Trent XWB, Trent 7000 and Trent 1000. On top of that, the firm is seeing weakness in offshore marine markets.

That’s all caused a profit headwind in the near term. At 692p, the shares are down more than 45% from the high they reached at the beginning of 2014. City analysts following the firm expect earnings to decline 17% this year and a further 18% during 2016. Yet Neil Woodford is holding on.

At this level, the forward dividend yield is attractive at almost 3.3%, and those reduced forward earnings should cover the payout nearly twice, which makes the dividend look unthreatened. The forward price-to-earnings (P/E) ratio sits at about 16.

I doubt whether Rolls-Royce’s business is in terminal decline. The chief has it that the firm continues to invest in product launches, supply chain transformation, and sustainable business improvements to strengthen the company’s competitive position. He says the firm is engaged in an ongoing operational review to concentrate on how to drive improvements and sharpen focus to make Rolls-Royce a more resilient and sustainable business. To be holding now, Neil Woodford must believe that these actions will pay off down the road. 

Growth and cyclicality

Fashion retailer Next’s shares shot up by more than 750% since their post credit-crunch low in 2008. That strikes me as more than just a cyclical recovery — next is growing, too, and it’s been a great ride for investors, such as Neil Woodford, who kept the faith and held on.

At today’s 7555p share price, the firm trades on a forward P/E ratio of just over 16 for the 2016 trading year. For that price, new shareholders will get a 5.5% forward dividend yield covered just over once by forward earnings, which City analysts expect will grow 6% that year. To me, that makes Next’s valuation tricky. It’s not cheap for a cyclical company trading through, arguably, a mature stage of the general macro-economic cycle.

That said, Next is good at rewarding its shareholders with special dividends and share buybacks, which all serve to enhance income returns — perhaps one of the great attractions of Next as an investment. There is a fledgling international business that could grow, and perhaps there’s much further to travel in the current macro-cycle, which could mean Next achieves steady earning-per-share gains from here for some time to come. However, I’m cautious on Next now.

A low margin, high-competition outfit

Although Royal Mail’s forward dividend yield looks attractive at 4.9%, I’m unlikely to flirt with that payout because I don’t like the firm’s business model. Parcel post is a highly competitive and low-margin business, and letter post is in decline. There’s big potential for a slip in eanings to derail the share price and take back income gains from shareholders.

The shares have been volatile since the firm’s flotation on the stock market at the end of 2013, and volatility seems set to remain a feature of the shares. Neil Woodford is holding and I’m avoiding — after doing your own research, take your pick!

The post Should I Pile Into Neil Woodford Picks Rolls-Royce Holdings plc, Next plc And Royal Mail plc? appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Kevin Godbold 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.