2 turnaround stocks I'd consider buying before 2018

Hikma Pharmaceuticals(LSE: HIK) has taken investors on a roller-coaster ride since listing on the stock market in 2005. Ten years of tremendous organic growth, supplemented by acquisitions, saw it promoted to the FTSE 100 in 2015. However, having reached a peak of over 2,600p last year, its shares have fallen back dramatically, hitting a new multi-year low of under 1,000p this month.

However, in its reduced circumstances (it's been demoted back to the second-tier FTSE 250) and at its depressed share price, Hikma is one of two turnaround stocks I'd buy before 2018.

Recent difficulties

A trading statement last week was indicative of its recent difficulties. It reported a good performance from its Injectables business, steady improvement from its Branded business, but cut its forecasts for Generics for the third time this year.

The company said that as a result of challenging market conditions impacting the US generics industry, it had experienced greater than expected price and volume erosion and that it expects these market conditions to persist in 2018. Also within Generics, it said it still hasn't been able get the US Food and Drug Administration (FDA) to approve its generic version of GlaxoSmithKline's Advair.

Three reasons to buy

There are three reasons I rate Hikma a 'buy' before 2018. First, I reckon the subdued outlook for the Generics division is fully priced-in. Second, generic Advair could yet get the go-ahead, with the company having entered a dispute resolution process with the FDA, which it expects to complete in Q1 2018. Third, and most significantly, I calculate Hikma's strong balance sheet gives it up to $1.5bn of firepower to pursue value-enhancing acquisitions, joint ventures or share buybacks. As such, I reckon the shares look cheap on current City earnings forecasts for 2018, which give a P/E of under 14.

Hidden value

In June, under its new chief executive, small-cap Molins(LSE: MLIN)announced the sale of its tobacco machinery division to focus on its higher-growth packaging machinery division. The shares were trading at 101.5p at the time and I calculated the fair value of the rejigged company as between 175p, based on my estimation of net asset value (NAV), and 197p, based on applying the same sales multiple at which the tobacco machinery division was sold to the forecast sales of the retained business.

The deal, and a subsequently announced sale of a Canadian property, didn't complete before Molins' half-year-end but there's enough information in the half-year results to revise my fair value estimates. The sales-multiple-based value remains at 197p, but the NAV rises to 221p.

Balance sheet NAV at the half-year-end was £40.7m. So I remove book value of the Canadian property of £1.5m and tobacco machinery division assets of £38.6m and liabilities of £11.8m. Then I add net cash proceeds from the Canadian property sale of £5.9m, less £1m to adapt a new leased building, and net cash proceeds of £27.3m from the tobacco machinery division sale, of which £1.5m of warranty escrow goes into trade receivables and £2.7m into pension assets.

The result is a NAV of £44.6m, representing 221p a share. The shares are currently trading at around 140p. I reckon the value on offer here could attract wider attention when the company releases its annual results (with a clean balance sheet) in early 2018.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

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