Are Centrica PLC, Travis Perkins plc And Shire PLC Capable Of 20%+ Returns?

Can these 3 stocks really rise by 20% or more? Centrica PLC (LON: CNA), Travis Perkins plc (LON: TPK) and Shire PLC (LON: SHP)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in building supplies company Travis Perkins (LSE: TPK) have fallen by as much as 6% today after it released a profit warning. It now expects profit growth to be at the lower end of market expectations owing to challenging market conditions, with weaker than expected market demand being experienced in the third quarter of the year.

Encouragingly, though, Travis Perkins has made an improved start to the fourth quarter of the year and, while its third quarter performance was somewhat disappointing, it is making progress as a business. For example, it is continuing to outperform its key markets, is on-track to create and extend structural advantages as part of its five-year plan and modernise its IT and supply chain infrastructure. This means that, should the repair, maintenance and improvement market pick up in the coming months, Travis Perkins is well-positioned to take advantage of this.

Looking ahead, Travis Perkins is expected to increase its bottom line roughly in-line with the wider market in the current year and post above-average earnings growth next year. As such, its price to earnings (P/E) ratio of 15.3 appears to be fair and, with it positioning itself to take advantage of improvements in the outlook for the building supplies market, its bottom line growth rate could easily rise in the coming years. As such, and while its shares may come under further pressure in the short run, it appears to be very capable of rising by more than 20% over the medium term, although this is likely to come from a pickup in profit growth rather than a rerating.

Meanwhile, Centrica (LSE: CNA) has also endured a challenging period, with the weak oil price hurting the profitability of its exploration and production arm. Partly because of this, the company has decided to become a pure play domestic energy supplier and has commenced a vast restructuring which will see its oil and gas assets sold off alongside annual savings of £750m being made.

Not only do these changes have the potential to improve the company’s bottom line, they could also aid investor sentiment which has been weak in recent years. In fact, Centrica’s share price has fallen by 21% in the last year and now trades on a P/E ratio of only 13. This indicates that there is considerable upward rerating potential when many of the company’s utility peers trade on higher ratings. And, with Centrica having a yield of 5.2%, this is further evidence that a 20% share price rise is very achievable, since it would leave the company with a still very appealing yield of 4.3%.

Similarly, Shire (LSE: SHP) has the potential to deliver capital gains of over 20% and, with market sentiment being weakened recently by disappointment surrounding FDA approval for its dry eye drug, Shire now trades on a relatively appealing P/E ratio of 18.3. For a pharmaceutical company which is aiming to double its top line over the medium term, this appears to be rather low and indicates that an upward rerating is on the cards.

However, even if Shire is not rerated upwards, its earnings growth of 17% which is forecast for next year looks set to positively catalyse its share price. While M&A activity may also boost Shire’s share price performance, even on its own it appears to be a sound long term buy at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Centrica. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »