These 2 battered stocks look set for a return to growth
My first pick for today is aero engineer Cobham(LSE: COB), which looks like it's finally emerging from a truly dire spell. Its shares had slumped after four straight years of falling earnings, but so far today we've seen a 5.5% gain on the back of first-half results, to 141.5p.
There's a 23% fall in earnings forecast for this year before a predicted return to growth in 2018, and a drop in first-half adjusted EPS from 3.8p to 2.5p reiterated the likelihood of that, especially with adjusted operating profit down 12% to £89.9m.
But that's pretty much in line with expectations, as chief executive David Lockwood pointed out that the company is "in the early stages of its turnaround and there remains a wide range of potential outcomes for 2017."
Cash had been tight, and a rights issue in May raised £479m. Add to that a cash conversion ratio of 120% in the half, which saw free cash flow rise by 20% to £64.6m, and we're looking at a net debt-to-EBIDTA multiple dropping from 2.3 times a year ago to a much more manageable 1.5 times.
As expected, there is to be no dividend this year, and there will be none paid until "it is prudent to do so." That's exactly the right approach just now, when efficiency, savings and cash retention are of utmost importance.
After a year in which Cobham shocked investors with massive writedowns (including a £150m impairment over its flight refuelling contract with the US Air Force), I really do think we're finally seeing light at the end of the tunnel.
There's still some significant risk, certainly, but I reckon Cobham's recovery prospects outweigh it -- and I'd buy.
Another bombed-out stock that has crossed my radar is Hikma Pharmaceuticals(LSE: HIK), whose earnings dropped in the past two years and whose share price has crashed by 47% in the past 12 months, to 1,409p.
The company got a big knock-back from the US Food and Drug Administration, which declined to approve its generic asthma treatment, VR315, intended as competition for GlaxoSmithKline's Advair Diskus.
VR315 has not actually been rejected, and there's still a chance for it. But the harsh reaction to the FDA's response is not surprising, as VR315 could be very lucrative for Hikma (and for Vectura, from whom Hikma licenses the powder formulation it uses).
But even without VR315, Hikma has an impressive array of treatments in its arsenal (the firm sells more than 700 products worldwide) and, I think, a very promising future. And I do think the share sell-off has been overdone.
There's now an 8% drop in EPS forecast for the current year, but a 24% upturn suggested for 2018 would drop the P/E to under 14. Dividends look set to yield under 2% this year and next, but they're nicely progressive and very well covered by projected earnings -- if 2018 predictions come off, we'd be looking at cover of four times.
And we shouldn't write off that VR315, as a new amended application for FDA approval will be in the pipeline -- though it will probably take around 12 months. But we should see that as a bonus -- even as it stands now, Hikma looks like a buy to me.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.