2015 has been a rather disappointing year for temporary power generation company Aggreko (LSE: AGK). Its shares have fallen by 1% as it endures a period of transition, with a new CEO commencing work in January in an attempt to turn around a bottom line that has fallen by 17% during the last two years. And, with investor sentiment being relatively poor even though the company had a strong track record of growth prior to the disappointment of the last two years, the short term looks set to be rather tough for investors in the company.
Restructuring
Of course, a transitional period can be a great time to buy shares in a company. That’s because they may be lowly priced due to poor performance and investor sentiment could improve as a turnaround plan is implemented. So, with Aggreko today announcing a restructuring of its business, it seems to be taking the right steps in changing its performance.
In fact, Aggreko is to split its business into two separate divisions: Rental Solutions and Power Solutions, with divisions focusing on specific regions being a thing of the past. The Rental Solutions division will focus on the company’s developed markets, while Power Solutions will aim to increase Aggreko’s exposure to faster growing emerging markets, while also including the existing Power Projects offering, too.
Growth Potential
While the split of Aggreko’s business appears to make sense, since the needs of customers in emerging markets may be different than those in more developed countries, the company is still set to grow its bottom line at a rather pedestrian rate. Certainly, a restructuring may allow it to focus more on improving sales, but with Aggreko’s net profit set to grow by just 3% in the current year, and by 7% next year, it appears to be rather disappointing compared to the 10% – 25% annual growth from just a few years ago.
Furthermore, with Aggreko trading on a price to earnings (P/E) ratio of 17.6, it appears to be rather overvalued given its disappointing recent performance and modest prospects. As such, buyers of the company’s shares at these levels are hardly getting a bargain when Aggreko has a price to earnings growth (PEG) ratio of 2.3.
An Alternative
While Aggreko may not be worthy of investment at the present time, alkaline battery producer AFC Energy (LSE: AFC) appears to be very much on the up. Although its shares have risen by 341% since the turn of the year, there could be much more to come. That’s because it operates in an industry where there is tremendous growth potential and, unlike a number of its peers, AFC is now profitable and has therefore shown that it can turn a great product into a viable business.
And, with a number of projects in the pipeline and demand for cleaner, sustainable energy products set to rise, AFC seems to be on the up and has the potential to make further gains over the medium to long term. So, while Aggreko may be a stock to avoid at the moment for me, AFC appears to be a strong — albeit high-risk — buy.
