Investors did not react positively to Berendsen's (LSE: BRSN) 2016 results, which were released on Friday. Its shares fell by over 15% on the day and a further decline in the short run cannot be ruled out. The company is expected to record a difficult first half of the new financial year after what was a challenging 2016. However, could now be the perfect time to buy it? Or is it a stock to avoid?
A difficult year
The last financial year was difficult for the company because of legacy issues. Its second-half performance was impacted by challenges within its UK textiles segment (Workwear, Hospitality & Healthcare), with the sector reporting profits which were £10m lower than in the previous year. This caused operating profit to fall by 4% on a reported basis, although when the positive effects of currency changes are factored-in, operating profit increased by 5%.
Aside from the difficulties in UK textiles, the company's performance was in line with expectations. Its strategy is driving improvements in processes, controls and operational visibility, while capital investment in plant and machinery is being increased and accelerated. In fact, Berendsen expects to invest around £150m per annum in plant and machinery in each of the next three years. And since it continues to see good opportunities in attractive customer markets, its prospects appear to be bright.
While further issues are expected in the first half of the year from the troubled UK textile division, Berendsen's earnings growth potential is relatively bright. It is expected to record a rise in earnings of 6% in both 2017 and 2018, which is in line with the growth rate of the wider index. Following today's share price fall, the company now trades on a price-to-earnings (P/E) ratio of just 12.2. This is lower than its four-year average P/E ratio of 15.8. Therefore, if its rating reverts to the average of recent years and it meets its forecasts for 2017 and 2018, its share price could rise by as much as 46%.
Clearly, that may appear to be a rather ambitious figure. However, given the fact that the stock could benefit from weak sterling and also expects to make progress with its UK textile division and the rest of the business in 2017, it could be a strong long-term performer.
In fact, the company trades on a lower P/E ratio than sector peer WS Atkins(LSE: ATK). It has a rating of 12.6 and yet is forecast to grow its bottom line at a lower rate than Berendsen over the next two years. WS Atkins is forecast to record a rise in earnings of 4% next year and 5% the year after. This indicates that the company is performing well and could be worth buying given its current valuation. However, its sector peer could have significantly more upside potential after today's share price fall.
Since Berendsen has a yield of 4.5% from a dividend which is covered 1.9 times by profit, it also seems to have superior income prospects relative to its sector peer. The WS Atkins yield is 3% from a dividend which is covered 2.8 times by profit. Therefore, despite investor sentiment falling today, Berendsen could be a sound buy.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Berendsen. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.