Buying shares in a company which has surged over 10% higher after results is a tricky business. Certainly, it is likely that the outlook for the business is brighter than it was prior to the results. However, it can also mean that the market has now factored improved performance into the company's valuation. Reporting on Tuesday was a stock which could continue to rise even after its 10%-plus gains following the release of full-year results.
The company in question is distributor of specialist building products, SIG(LSE: SHI). Its results showed that the operating conditions it faces remain tough, with underlying operating profit down 14.9% versus 2015 and underlying pre-tax profit 19% lower. A main cause of this was a reduction in like-for-like (LFL) sales in mainland Europe of 0.4%.
Furthermore, the implementation of the company's strategy has proved challenging and it has therefore slowed or stopped a number of internal initiatives. This should allow a greater focus on customers and sales growth in order to bolster cash generation.
SIG's results, while disappointing, were in line with expectations. However, the main reason for the company's share price gain on the day of release was the appointment of Meinie Oldersma as CEO. Investors seem to be looking to a new era for the business, although trading conditions since the end of 2016 have remained tough. Inflation is becoming a greater problem for the business and increasing competition could lead to narrowed margins in the short run.
Of course, SIG is not the only building products specialist which is finding trading conditions tough. Sector peer Travis Perkins(LSE: TPK) recently recorded disappointing profitability and is expected to experience more challenges during the course of 2017. Therefore, SIG's forecast decline in earnings of 2% this year is perhaps to be expected. In fact, it is slightly better than Travis Perkins's expected 3% fall in earnings this year.
However, both stocks could have growth potential over a longer timeframe. For example, SIG is expected to record a rise in its bottom line of 10% next year, while Travis Perkins is due to return to net profit growth of 7%. Both of these figures are slightly higher than the wider index's expected return and show that there could be turnaround potential on offer.
In SIG's case, its price-to-earnings growth (PEG) ratio of one shows that there may still be upside potential on offer even after its recent share price rise. Travis Perkins's PEG ratio of 1.7 may also be attractive compared to the wider index, but there appears to be less upside potential on offer than for SIG.
While Brexit could prove to be a difficult period for both companies, their risk/reward ratios indicate that the market has fully factored-in their above-average risk profiles. And with positive growth forecast for 2018, both companies could be worth buying at the present time. Certainly, SIG's change in management and potential new strategy could improve investor sentiment. This could help to push its shares even higher after their positive response to Tuesday's 2016 results.
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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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.