Are Rolls-Royce Holding PLC, Chemring Group plc And Halfords Group plc Smart Buys In Today’s Volatile Market?

Do Rolls-Royce Holding PLC (LON:RR), Chemring Group plc (LON:CHG) and Halfords Group plc (LON:HFD) offer decent profit potential in uncertain conditions?

| 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 defence firm Chemring Group (LSE: CHG) fell by 10% this morning, after the group published a disappointing set of results and announced details of a planned £80m rights issue.

Chemring’s revenue fell by 6.5% last year and the group’s pre-tax loss widened to £9.1m from a loss of £5.2m in 2014. Net debt rose by 14% to £154m.

Chemring experienced a number of contract losses and delays last year, leaving it at risk of breaching its debt covenants. The group announced its intention to raise cash from shareholders in October and today’s news confirms these plans. Chemring will raise £80.8m by issuing four new shares at 94p for every nine existing shares.

Based on the information provided by the company, my calculations suggest that this should reduce net debt to between £80m and £100m. Based on the increased share count and the current forecasts for 2016 earnings, I estimate that Chemring shares should trade on a 2016 forecast P/E of around 15 after the rights issue.

I’m not sure that this is great value. Chemring’s business has declined steadily over the last few years. Although market conditions for defence firms do seem to be improving, I’d prefer to see more evidence of a recovery before buying.

Rolls-Royce

Shares in Rolls-Royce Holding (LSE: RR) have fallen by 50% since May 2015. It’s tempting to think that they must now be good value, but is this true? Long-time Rolls fan Neil Woodford recently sold his entire holding.

Although Rolls shares trade on a modest 2015 forecast P/E of 10, the outlook is rather different for 2016. Earnings are expected to fall by more than 40%, leaving the shares on a forecast P/E of 18.

Aside from its own restructuring challenges, Rolls faces a slowdown in the oil and gas-led offshore marine market. It also expects falling sales of corporate jets powered by Rolls engines, and reduced demand for its profitable aftersales services.

I’m confident Rolls will eventually recover under the management of ex-ARM Holdings boss Warren East, but I don’t see any reason to buy today. The current market turmoil makes me even more cautious. I’ll be very surprised if Rolls shares don’t have further to fall.

Halfords

One of the top performers in the UK market today is Halfords Group (LSE: HFD). Shares in the cycle and car parts retailer rose by 9% this morning after the company said that cycle sales returned to growth during its third quarter, which included Black Friday and Christmas.

However, like-for-like sales growth for Cycling was just 1.1%. The group’s total sales rose by just 0.4% during the period. Growth has been much slower than during the same period of 2014, so it may be too soon to draw any conclusions.

Halfords’ full-year profits are expected to be in line with previous guidance, putting the shares on a forecast P/E of 11 and a prospective yield of 4.7%. Halfords has very little debt and has historically generated enough free cash flow to comfortably cover its dividend. I’d expect the firm’s sales to be able to support this modest valuation.

If you’re confident about the UK economy, Halfords could be a solid contrarian buy.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

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 »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »