My thinking was that the eventual recovery from this setback would coincide with a wider recovery in the oil market. Company profits and market sentiment would gradually improve together, leading to a re-rating of the share price.

How’s it going so far?

Progress so far has been good. When I last wrote about it at the start of March, the firm’s shares were changing hands for about 430p. They’ve risen by about 30% since then, as the price of crude oil has surged towards $80.

The company has also announced more than $1.1bn of new contracts in India and the Middle East over the last two months, suggesting that its sales pipeline may be improving.

We’re not out of the woods yet

Some challenges remain. We don’t yet know the outcome of the SFO investigation. There’s a risk that the company could face a substantial fine if found guilty.

A second problem is that profits are expected to fall again in 2019. The legendary growth investor Jim Slater always recommended not buying a turnaround stock until forecasts showed a return to profits growth.

Good value

Petrofac’s growth credentials may still be uncertain. But for value investors, I think the firm has a lot to offer. Free cash flow totalled about £215m last year, giving the stock an attractive free cash flow yield of 10% and supporting the dividend.

Profit margins also seem to have stabilised. Last year saw an underlying operating margin of 8%. Forecasts for 2018 suggest to me that a similar result is likely this year.

My target share price of 800p would put the stock on a P/E of about 12.6, based on 2018 forecast earnings. That’s probably a bit punchy at the moment, but it should be achievable once the business returns to growth.

Today, the shares trade on a forecast P/E of 9.5 with a prospective yield of 4.8%. I believe they offer good value at this level.

Another special situation?

Indian mining group Vedanta Resources (LSE: VED) has provided a rich stream of dividends for investors brave enough to take the plunge.

I say brave because this group carries certain extra risks when compared to the other big FTSE mining plays. Its Indian copper business has run into problems recently. And unlike most rivals, it hasn’t yet taken advantage of the mining recovery to reduce debt levels.

Vedanta ended last year with net debt of $9.6bn, up from $8.5bn one year earlier. This borrowing equates to 2.3 times earnings before interest, tax, depreciation and amortisation (EBITDA) and to a whopping 6.4 times last year’s after-tax profit of $1.5bn.

Both of these figures are too high, in my view. But in this case I might make an exception.

Two hidden advantages

There are two reasons for this. The first is that Vedanta’s assets are highly cash generative. The group generated free cash flow of about $560m last year, covering its $164m dividend payment more than three times over.

The second reason relates to the group’s ownership. Chairman Anil Agarwal controls Vedanta through a 67% stake that’s held by his investment vehicle, Volcan Investments. Only 25% of the group’s shares are traded publicly.

This carries risks for minority shareholders, as Volcan can effectively control the group’s future. But Mr Agarwal has kept Vedanta listed on the London market for 15 years. I think it’s unlikely that he’ll turn rogue now. And if the commodity market remains stable, I think he should be able to refinance and repay the group’s borrowings without much difficulty.

In my view, Vedanta stock is priced cheaply enough to reflect the risks I’ve discussed. The shares trade on a forecast P/E of 7.9 for 2018/19, falling to a P/E of just 4.9 for 2019/20. The forward yield of 7% should be covered by earnings and free cash flow. For bold investors, I believe this could be a profitable buy.

The post Will the Petrofac share price reach 800p in 2018? appeared first on The Twelfth Magpie.

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Roland Head owns shares of Petrofac. 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, if you’re looking for a stock with a bit more of an income kick, there’s one company out there that seems to me to be the perfect buy.

Sudden setback

Vedanta (LSE: VED) might not be the first choice for income seekers, but the company’s 7% dividend yield is, in my opinion, too attractive to pass up. 

The India-focused miner has recently come under pressure following the police killing of 13 people who were protesting against a proposed expansion of a copper smelter in the south Indian town of Tuticorin, owned by Vedanta subsidiary Sterlite Copper. Protesters have been trying to stop the development, complaining that it would cause a dangerous increase in pollution from the plant, which is India’s largest smelter. The proposed expansion would have doubled annual capacity to 800,000 tonnes. 

Over the weekend it was announced that, following the use of lethal force by police against protesters, the government had moved to shut down the smelter for good. This will hit Vedanta’s bottom line, but it’s unlikely to be terminal. According to a press release published by the firm last week, despite the size of this smelter, it accounted for only 5.4% the group consolidated EBIDTA during the previous financial year. 

So, even though this is a set back for the group, it’s not the end of the world. What’s more, over the past 12 months, rising commodity prices have helped Vedanta roar back to profit, something City analysts had been expecting to continue into 2018. With this being the case, rising commodity prices should help the group offset some of the hit from the smelter closure. As my Foolish colleague Peter Stephens recently highlighted, Vedanta “offers a diverse business model which could provide it with a lower risk profile than many of its industry peers.“

Unloved income 

Shares in Vedanta have lost nearly 17% over the past week due to its Tuticorin smelter problems. After this decline, the shares have fallen to a valuation of 6.6 times forward earnings and support a dividend yield of 6.9%. This valuation suggests to me that most of Vedanta’s problems are now reflected in the company’s stock price. 

Indeed, after the recent declines, its shares are the cheapest in the UK metals and mining sector, a valuation that doesn’t seem to take into account the firm’s projected growth over the next few years. City analysts have been expecting group net profit to more than double through 2020. And while the closure of the smelter now means it’s unlikely the group will meet this lofty growth target, I believe it’s still possible Vedanta will grow earnings at a double-digit annual rate over the next few years as other growth initiatives progress and the company profits from higher commodity prices. 

And even if the group’s growth stalls, the stock’s dividend looks secure. Last year, the distribution was covered 1.3 times by earnings per share and analysts had been expecting the cover to hit 2.1 times this year.

All in all, Vedanta looks to me to be a much better income buy than the FTSE 100, despite its recent troubles, which are not expected to be terminal. 

The post This 7% dividend stock still looks a far safer bet than the FTSE 100 appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share 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.

Even though the stock only hit the market at the beginning of March 2017, it has been one of London’s worst performing investments over this period, losing around 75% of its value since coming to market. And today, the shares trading down once again after the group issued yet another profit warning. 

Struggling to remain relevant 

For the six months ended at 31 January 2018, the supplier of consumer goods brands booked revenue of just £48.4m, down from last year’s figure of £68.1m for the same period. While the company does say in its trading update that the first half of 2017 was unusually strong, it also goes on to say that 2018 is turning out to be an extremely tough year for ordering with many orders now falling into fiscal 2019 rather than the second half of 2018. Meanwhile, “retailer sentiment with regard to placing general merchandise orders in the short-term has not improved” and “lower volumes available to non-food suppliers, along with retailers’ desire to minimise increases in retail prices, has created an even more competitive environment than normal.” As a result of these issues, management now expects the firm to report underlying EBITDA of between £6m to £7m for fiscal 2018, which is significantly below current market expectations. Indeed, the market had been expecting the group to report a net profit of £6.1m for the year.

The one bright spot in the company’s performance update is a commitment to its dividend yield of 12.5% although with trading performance deteriorating, it’s difficult to see how management can accomplish this. 

A better income buy 

As it looks as if Up Global’s problems aren’t going to go away anytime soon, I would avoid this falling knife as there are plenty of other more attractive looking investments out there. One example is global mining giant Vedanta (LSE: VED). 

Like UP Global, Vedanta has been buffeted by some adverse headwinds over the past few years. However, the company has been able to recover steadily from these issues and now looks well placed to grow with commodity prices rising and an improved balance sheet. 

At the beginning of November, the company reported a near 40% jump in first-half earnings before interest tax depreciation and amortisation to $1.7bn thanks to higher commodity prices — an impressive recovery from last year’s loss of $5bn. As earnings grow, the group is also on track to reduce net debt to less than three times earnings from around $9bn. 

As Vedanta is majority owned by its founders and current management, they are incentivised to make the business as profitable as possible and work for all investors. That’s why I believe that the company is a fantastic income stock because its majority shareholders will not let the business go under as they have billions invested. 

Right now, the shares support a dividend yield of 6.6% and the payout is just covered by earnings per share. Next year, however, payout cover is set to hit 1.7 times as City analysts expect earnings per share to jump 82% thanks to further operational improvements and commodity price gains.

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Indeed, the business has been able to achieve an average operating profit margin of 15% over the past six years, as well as an average return on equity of around 20%. With returns high, Smiths has been able to compound book value per share at a rate of 16% per annum for the past six years. 

Expansion continues 

It looks as if this is set to continue. Today the firm announced in a trading update that while revenue during the first quarter decreased 2% on an underlying basis, primarily due to order timing, management expectations for the full year are unchanged and the group is expected to return to growth in 2018. 

To help its growth, one of the group’s subsidiaries acquired the heating element division of Osram, broadening its portfolio into faster-growing engineered heating solutions.

For the full-year, City analysts are expecting the company to grow earnings per share by around 7.5%. Growth of 6.5% is projected for the year after. 

As well as the steady expansion, I believe Smiths’ shares are undervalued. At the time of writing the shares trade at an EV/EBITDA ratio of 8.7 compared to the sector average of 14.1, a discount of nearly 40%. On top of this depressed valuation, shares in Smiths support a dividend yield of 3%. The payout is covered 2.3 times by earnings per share leaving plenty of room for dividend growth and further investment in the business. 

Impressive recovery 

Vedanta (LSE: VED) is another FTSE 100 income stock that looks to me to be undervalued. Over the past few years, investors have given the mining sector a wide berth due to concerns about debt and fluctuating commodity prices. But during the past 12 months, it has become clear that the industry is getting itself in order with debt falling, profits rising and commodity prices stabilising.

Vedanta is no different. At the end of last week, the company revealed a 37.4% rise in half-year profit. Operating profit from its zinc business surged nearly 80%, as zinc production in India jumped 42.1%. This means that after three years of turbulence, the firm is now firmly back in the black. 

Undervalued dividend play

For the full year ending 31 March 2018, City analysts are projecting a pre-tax profit of £1.8bn, up from last year’s £1bn, and earnings per share of 65.2p, up from last year’s 0.7p. Further growth is projected for the following fiscal year. Earnings per share are expected to expand 51% year-on-year to 99p comfortably covering the firm’s dividend distribution of 42p. 

These projections indicate that shares in Vedanta are currently trading at a forward P/E of 10.8 and yield 4.8%. Considering the firm’s rapid earnings expansion, and room for further dividend growth, this valuation looks to me to be too good to pass up. 

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Rupert Hargreaves owns no share 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.

But the business’s financial progress hasn’t been as rapid as its stock market gains. And while I wouldn’t rush to sell shares in this British champion, I’m not sure I’d want to buy them.

Future uncertainty

Last week’s trading statement confirmed that Rolls’ 2017 results should be in line with expectations. According to the latest broker consensus forecasts, that means a net profit of £570m and adjusted earnings of 34.5p per share.

This puts the stock on a forecast P/E of 27, with a prospective dividend yield of just 1.3%. Clearly this valuation is pricing in a better future, with higher profits and a more generous dividend.

I suspect that the group’s highly-regarded chief executive, ex-ARM boss Warren East, will deliver on this promise. But I don’t know quite how long it will take.

The risk for investors — in my opinion — is that the firm’s near-term performance is uncertain and could be disappointing. In addition to the complexities of the group’s changing business model, investors also have to cope with a change in accounting rules.

This shift — to IFRS 15 rules — will mean that the way the company reports revenue from multi-year customer contracts will change. In turn, this will mean that Rolls doesn’t plan to issue any guidance for 2018 until its 2017 results are published in March. By then, we’ll already be a quarter of the way through the year.

Long-term only

I believe Rolls-Royce has a great long-term future. But that doesn’t necessarily mean that the shares offer good value to investors at current levels. I plan to wait for a better buying opportunity before considering this stock again.

A dividend stock I’d consider

If I was looking for a dividend stock to buy today, I’d be more interested in FTSE 250 mining group Vedanta Resources (LSE: VED). This £2.4bn Indian firm is a little quirky as it’s controlled by chairman and majority shareholder Anil Agarwal.

But Vedanta owns a lot of low-cost mines, which are powering strong profit growth this year. Today’s half-year results flagged up some impressive figures. Revenue rose by 39% to $6.8bn during the six months to 30 September, while earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 37% to $1.7bn.

One concern with this business is that it carries a lot of debt. The group’s total borrowings fell by $3.1bn to $15.1bn during the six-month period, although net debt (including cash) rose slightly to $9bn, due to dividends paid by the group’s subsidiaries.

Strong cash generation

Unusually for me, I’m not too worried about Vedanta’s debt levels. The reason for this is that this group generates a lot of cash. I don’t see debt repayments as a big challenge if the commodity market remains stable.

This cash also enables the group to pay an attractive dividend. The company’s measure of free cash flow was $232m for the first half. That’s more than three times the cash needed to fund the interim dividend of $0.24 per share.

Shares in this mid-sized mining group currently trade on a P/E of 13.5, with a prospective yield of 4.4%. I’d be happy to buy at this level.

The post Why I’d buy this dividend stock over Rolls-Royce Holding plc appeared first on The Twelfth Magpie.

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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 oilfield services mammoth was last dealing 11% lower on the day, although bouncing off intra-day highs — it had fallen below the 80p per share barrier for the first time since last November earlier in the session.

Lamprell announced revenues of $159.2m between January and June, a shocking 65% decline from the corresponding 2016 period when turnover rang in at $451.3m.

And the Dubai-based business took the hatchet to its full-year sales guidance too. It now anticipates turnover of £370m to £390m “due primarily to the continuing low levels of walk-in work reflecting market conditions.” This is a meaty reduction from the firm’s prior forecast of $400m to $500m.

If this wasn’t disappointing enough, Lamprell suggested that things are not about to improve any time soon. It added that the outlook for 2018 “remains challenging with revenue currently expected to be around 10% lower than 2017 levels, contingent on the timing of potential contract awards.”

Chief executive Christopher McDonald said: “Top-line performance will remain subdued as a result of the slow pace of the new major contract awards that we have seen over the past 24 months.” He added: “We do not expect to see the potential improvement in market conditions impacting our business in 2018 due to the lag between improved market conditions and project awards in our business streams.”

McDonald said that while levels of bidding activity have increased, Lamprell does not expect to see turnover grow until 2019.

Losses predicted

On the plus side, Lamprell advised that it had flipped back into the black during the first six months of 2017. It recorded net profit of $1.1m versus the $4.4m loss printed 12 months earlier, reflecting the efforts it has made to strip costs out of the system.

Still, the City was not expecting these measures to prevent Lamprell reporting losses for this year and next, with losses of 2.8 US cents and 0.1 cents per share forecast for 2017 and 2018 respectively. And these figures are likely to be downgraded on the back of today’s release.

Given that the enduring market imbalance is likely to keep crude prices on the defensive, and with it the exploration budgets of oil explorers across the globe, I believe Lamprell’s top line could remain under pressure for a long time to come.

Another one to avoid

I also reckon share pickers should give metals and energy giant Vedanta Resources (LSE: VED) a wide berth right now.

Like Lamprell, Vedanta is also at the mercy of the worrying supply and demand outlook washing over the crude sector, but this is not the only worry as supply concerns in its other key markets of zinc, iron ore and copper also hang heavy.

The City expects earnings at the FTSE 250 business to surge from 1.1 US cents per share to 87.5 cents in the year to March 2018, on the back of surging metal values, and again to 164.2 cents in fiscal 2019.

I believe these estimates of sustained profits growth could be subject to severe downgrades in the months ahead, however. So despite its forward P/E ratio of 12.6 times, I reckon Vedanta is still too risky right now.

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Royston Wild 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.

NMC Health (LSE: NMC) is a fantastic play on this theme. The company is a private healthcare services provider in the United Arab Emirates (UAE) and is one of the richest companies in the world with a GDP per capita of $67,700, compared to the UK’s $42,500.

Rising demand for the company’s services, coupled with both organic and inorganic growth has helped revenue more than double and pre-tax profit rise more than 150% over the past five years. Moreover, City analysts expect the company to report earnings per share growth of 29% this year, and 28% for 2018. If these targets are met, NMC will have achieved earnings growth of 250% in seven years.

However, it now looks as if the company is set to surpass these expectations. Figures released today for the six months ended 30 June show revenue growth of 34% year-on-year and adjusted net profit growth of 56%.

Further growth ahead? 

NMC’s existing presence in the UAE gives it a huge, stable base to expand from. Indeed, the company is growing into Saudi Arabia and Oman as well as opening fertility clinics around the world. 

Put simply, there’s no doubt that NMC has a long runway for growth ahead of it as expansion continues and more people use its facilities. These traits make the company the perfect stock to buy, forget and watch your profits grow. While the valuation of 29.9 times forward earnings might put some investors off, and the dividend yield of 0.6% leaves much to be desired, if the company’s growth carries on at its current rate, earnings per share could reach 200p by 2021. Based on this estimate, the shares look attractive at current levels.

Cash cow? 

Vedanta Resources (LSE: VED) might not be investors’ first choice when it comes to picking growth stocks, but the company does have a bright future ahead of it if City forecasts are to be believed. 

Analysts have pencilled in earnings per share growth of 7,616% for the financial year ending 31 March 2018, as the firm rebounds from several terrible years between fiscal 2015 and 2017. For the year ending 31 March 2019, further earnings growth of 98% is expected. Based on these estimates shares in the company trade at a 2019 P/E of six and currently yield 5.4%.

Today the company revealed that it is on track to hit City forecasts in the years ahead. For the quarter to the end of June, earnings before interest tax depreciation and amortisation rose 48% while overall revenues grew 32%. Higher prices boosted revenues while actions over the past few years to reduce costs help the bottom line.

A strong operating performance helped Vedanta reduce overall gross debt by $1.3bn during the quarter, and according to the press release today, a further debt reduction of $385m has occurred since the end of June. With total cash and liquid investments of $7.4bn compared to gross debt of $16.8bn, the company is well capitalised, and further actions to reduce debt will only improve the financial situation. The stronger balance sheet will help secure the dividend and support further growth. 

With Vedanta’s outlook improving, the group’s low valuation looks unwarranted. 

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Rupert 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

Long-term growth

Earlier this year the FTSE 100 diversified mining group pleased investors with a very positive set of full-year results for 2016, aided by a partial recovery in commodity prices. The Anglo-Australian mining giant swung to a profit for the 12 months to the end of December, with net earnings of $4.6bn, compared to a loss of $866m a year earlier. Underlying earnings came in at $5.1bn, 12% higher than the $4.5bn posted in 2015.

The group also managed to achieve $1.6bn of pre-tax sustainable operating cash cost improvements, and strengthened its balance sheet by reducing net debt by 30% to $9.6bn. The company has been busy optimising its portfolio, with disposals of $1.3bn announced or completed in 2016 and up to $2.45bn announced to date in 2017. At the same time, expansion continues with investment in major growth projects in bauxite, copper and iron ore.

Despite the monumental share price surge over the past couple of years, I still believe Rio has potential for further long-term growth. A P/E ratio of less than 10 means the shares are relatively inexpensive, and well-supported by a chunky dividend with a prospective yield of 6.1%.

Exciting prospects

Another diversified mining group that looks to be trading on a very reasonable valuation is Vedanta Resources (LSE: VED). The FTSE 250-listed company may be synonymous with India, but the group also has operations in Zambia, Namibia, South Africa, Ireland, Liberia and Australia, producing aluminium, copper, zinc, lead, silver, and iron ore. And since the acquisition of Cairn India from Cairn Energy in 2011, oil & gas production is also now a significant part of the business.

Results for FY2017 were very positive, with full-year revenues rising by 7% to $11.5bn and pre-tax profits reported at $1.38bn, a vast improvement on the $5bn loss it suffered the previous year. The encouraging results led the board to recommend a final dividend of 35¢ per share, bringing the total for the year to 55¢, a substantial improvement from the 30¢ full-year payout for FY2016.

Despite its geographical diversity, the group still derives around 58% of revenues from its Indian operations, and with the country’s government encouraging businesses to manufacture their products in India, the resulting growth in GDP should bring about meaningful increases in demand for metals and energy. Given such exciting growth prospects, a P/E rating of just eight for FY2018 coupled with a prospective dividend yield of 6.4% just seems too good to pass up.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. 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.

After hitting its highest in almost half a year earlier in May, a mixed trading update has since sent the pub and restaurant operator’s stock value shuttling 13% lower to current levels around 240p. But I believe now could represent a great time for savvy dip buyers to move in.

Plenty of upside

Of primary concern to investors is the steady rise in its cost base, a point the company again underlined this month. It said “margins [in the six months to March] have been adversely impacted by increased costs, most notably from wage inflation, property costs and exchange rate movements.” And these troubles are unlikely to end any time soon.

However, I believe the market is overlooking the Toby Carvery and All Bar One owner’s continuing sales improvement. Like-for-like revenues rose 1.6% between October and March, a departure from the 0.8% side endured in the full year to September 2017.

Mitchells & Butlers has thrown wads of cash at its restaurant estate to keep pulling diners through its doors, and the expansion of its Miller & Carter brand of steakhouses offers plenty of further top-line opportunity. The company plans to have 100 sites up and running by the end of 2017 from around 67 right now.

The City does not expect its earnings woes to end any time soon however, and a 1% decline is anticipated for the year to September 2018, following on from last year’s 2% reversal. And earnings are only expected to tentatively improve further out, a 1% advance being expected in fiscal 2019.

Still, these projections leave the pub powerhouse dealing on a prospective P/E ratio of just seven times, well below the bargain-basement watermark of 10 times. Such a reading more than bakes in the troubles surrounding Mitchells & Butlers’ cost worries in my opinion, and leaves plenty of scope for a fresh share price charge should sales — as I expect — continue to trek higher.

Uncertain outlook

I am not so optimistic on the investment outlook for Vedanta Resources (LSE: VED), however, and believe the commodities colossus could add to the 40% share price fall endured since the firm printed mid-February’s two-and-a-half-year peaks.

A falling zinc price has been a major driver of the company’s descent in recent months (the galvanising metal generates around two-thirds of Vedanta’s profits). But falling metal values are not the only cause for concern as rising shale output from the US has also put the company’s fossil fuel operations under the microscope.

The number crunchers expect earnings at Vedanta to charge to 163.5 US cents per share in 2017, up from 1.1 cents last year and resulting in a P/E ratio of 5.1 times. And the bottom line is expected to keep surging, with earnings of 206.2 cents forecast for next year.

However, I believe these figures could be set for swingeing downgrades should commodity prices continue to falter, a stark possibility as the health of China’s economy is back on the agenda (just last week Moody’s cut the country’s credit rating). And looking elsewhere, political pressure in Washington could also see President Trump’s ambitious infrastructure plan hit the buffers and drag raw material values even lower.

I reckon the risks continue to outweigh the possible rewards at Vedanta, even at current prices.

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• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Royston Wild 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.

Encouraging update

Reporting on Friday was Oil & Gas explorer Cairn Energy (LSE: CNE). It continues to make excellent progress with its drilling programme, with the company’s operations in Senegal offering significant production potential from its SNE field. Production in Cairn Energy’s North Sea assets is set to commence this year, which should improve the company’s cash flow and may lead to a higher valuation over the medium term.

With Cairn Energy due to move from loss into profit next year, its shares could gain a boost from improving investor sentiment. Certainly, they may have a forward price-to-earnings (P/E) ratio of 23, but with the potential for earnings growth beyond 2018 they could command an even higher valuation.

While the outlook for the oil price is uncertain, Cairn Energy looks to have benefitted from the supply glut of recent years. Its development costs have been relatively low and this has allowed a number of its projects to come in below budget. And with production cuts from OPEC likely to allow demand to catch up to supply in the near term, the company’s profitability could be boosted by a rising oil price over the medium term.

Low valuation

Also offering capital growth potential in the long run is diversified resources company Vedanta (LSE: VED). It has endured a difficult period, with low commodity prices causing its bottom line to slip into the red. However, for the 2017 financial year to the end of March it is due to have moved back into profitability. This has the potential to provide a boost to investor sentiment in the short run. It could also help to improve the company’s financial standing.

Looking ahead, Vedanta’s pretax profit is forecast to rise from £1.2bn in financial year 2017 to as much as £2bn in the next financial year. This rapid growth means that the company’s shares trade on a forward price-to-earnings (P/E) ratio of just 5.5. This suggests that there is scope for a sustained rise in the company’s share price, with a wide margin of safety also providing a degree of support in case the company’s outlook deteriorates.

Clearly, investing in resources stocks is a relatively risky decision. Commodity prices could move sharply in either direction. However, with a low valuation, a large amount of diversity and improving financial performance ahead, Vedanta seems to offer an enticing risk/reward ratio for the long run. Therefore, even with the FTSE 100 at a record high, now could be the right time to buy it.

The post 2 turnaround shares I’d buy before it’s too late appeared first on The Twelfth Magpie.

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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.