2 turnaround stocks to consider buying before it's too late

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Rotork

Today I'm looking at the latest updates from two mid-cap engineering firms. They've delivered very different results over the last year, but in this article I'll explain why I believe both companies could deliver further upside for investors.

A promising start to 2017

Electronics firm Laird (LSE: LRD) rose by 5% following Friday's first-quarter trading update. Although this is nowhere near enough to wipe out the impact of October's 45% share price crash, the outlook does seem to be improving for this former FTSE 250 stock.

New chief executive Tony Quinlan has overseen a £185m rights issue to cut debt, and trading seems to be improving. Laird's revenue rose by 15% to £197m during the first quarter, or by 8% excluding exchange rate gains.

Growth was reported in two out of the firm's three divisions during the quarter. On an organic constant currency basis, sales rose by 4% in the group's Performance Materials division and by 24% in the Connected Vehicle Solutions business. Although constant currency revenue fell by 6% in Wireless and Thermal Systems, Laird says this is in-line with expectations.

We haven't yet seen a full set of accounts from Laird following February's rights issue. But my calculations suggest that this fundraising should have allowed the firm to reduce 2016 net debt from £344.6m to between £160m and £200m. That should be low enough to prevent further problems, in my view.

Broker consensus forecasts suggest Laird will deliver a net profit of £45.1m in 2017. This equates to forecast earnings per share of 8.9p for 2017, giving a P/E of 16.1. A dividend of 2.8p per share is expected, giving a forecast yield of 1.95%.

We'll find out more when Laird publishes its interim results in July. But I think the stock could be a good recovery buy at current levels.

A growth play

The market was less impressed with this morning's Q1 update from FTSE 250 engineer Rotork (LSE: ROR). Shares in the maker of valve and actuators fell by as much as 4% when markets opened on Friday.

The update confirmed that expectations for the year are unchanged. However, the group's first-quarter performance was uninspiring. While revenue rose by 14.5%, all but 1.4% of this was due to currency gains. Sales fell in two of Rotork's four divisions when currency gains were excluded.

Rotork says that results will be weighted to the second half of the year, "as usual". The outlook certainly does seem to be improving. The firm reported "good activity in the power and industrial markets" and said that the order book at 2 April was worth £203.3m, 12.5% higher than at the end of 2016.

Another attraction is Rotork's strong balance sheet. Cash generation has remained good and net debt has fallen to £44.7m so far this year, down from £55m at the end of 2016. That's very modest when compared with last year's pre-tax profit of £91.1m.

If management can reverse the fall in profit margins seen since the oil market crashed in 2015, I suspect Rotork could outperform expectations over the next couple of years. In my view, the stock remains a hold and could be worth buying next time the market dips.

Is this today's top growth buy?

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The company concerned is a UK-based business that's expanding globally. Our experts believe the market is underestimating the potential for profit growth at this well-regarded firm.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Rotork. 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.