With recent weakness in global stock markets, I’m taking a look at four shares with attractive long-term fundamentals.
Rolls-Royce
At the weekend, The Guardian reported that Rolls-Royce (LSE: RR) will be facing a second corruption investigation in Brazil, looking at allegations that the company paid bribes to win contracts with Brazil’s state-owned oil company, Petrobras. Rolls-Royce is already being investigated by the UK’s Serious Fraud Office for potential bribery and corruption in Indonesia and China. The pressures from recent corruption allegations seem to intensifying, and the prospects of Rolls-Royce facing heavy financial penalties is increasingly more likely.
Meanwhile, Rolls-Royce is already struggling with falling demand for almost everywhere. The impact of defence spending cuts and lower oil prices has intensified, causing the group to report a 32% decline in underlying pre-tax profits. Even its most promising business segment, commercial aerospace engines, reported a 27% decline in underlying operating profits.
But although the engine maker is likely to endure more short-term pain, longer-term fundamentals are attractive. Limited competition in the sector and robust commercial aircraft demand should mean falling revenues and earnings would only be a short term issue.
Dialight
Dialight (LSE: DIA) has announced plans to cut 12% of its workforce, following a 74% decline in its 2015 H1 underlying operating profits to £1.7 million. Demand for industrial and hazardous LED lighting products remains buoyant and Dialight has been growing its market share, but ballooning costs have held back profits.
Despite the collapse in profits, revenue for the first half of 2015 actually grew 14%, with lighting revenue increasing by 24%. With demand so buoyant, some sacrifice in margins in the shorter term should not be a major worry for investors. Although long-term fundamentals are broadly intact, Dialight’s forward P/E of 34.3 shows it is still an expensive stock.
Land Securities
Fears over falling foreign investment appetite for London commercial property have hurt shares in Land Securities (LSE: LAND). Its shares, which have been trading above its net asset value (NAV) for much of the past 52 weeks, now trades a 6% discount.
Although concerns over the slowing global economy present risks to the London property prices, underlying market trends suggest the outlook for Land Securities remains positive. The market for London office property remains very attractive, given the conversion of office space to residential use and the limited number of developments in Central London. This should mean the trends of rising rents and falling vacancy rates is only set to continue.
With London office space accounting for around 45% of the value of Land Securities’ portfolio, it is likely that the REIT will deliver further valuation gains in the medium term.
GW Pharmaceuticals
GW Pharmaceuticals (LSE: GWP) is looking to develop cannabis-based medicines for a wide range of treatments, including for schizophrenia, cancer pain relief, epilepsy and autism. As is expected of a pharmaceutical company focussing on early-stage drug development, GW is running at a loss.
In the nine months to 30 June, losses more than doubled on the prior year, from £14.9 million to £32.3 million, as R&D spending has been ramped up. However, with gross cash of £254 million, the company is well funded. Looking ahead, GW will receive further payments from its commercial partners upon the achievement of certain approval and commercial milestones, which should mean its financial flexibility will not be an issue for quite some time.
Although there are quite a few pharmaceutical companies looking at the potential of cannabis-based treatments, none have had as much success in clinical trials. This should mean GW’s drug pipeline is closer to market than many of its competitors. GW has four Phase 3 epilepsy clinical trials under way and recently announced positive proof of concept data in schizophrenia in a Phase 2a study.
With such attractive prospects, GW could find itself being an appealing takeover target. There are few signs that the recent flurry of consolidation activity in the sector is abating, as large pharma groups have increasingly turned to M&A to sustain growth in earnings.
