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Is Aggreko plc a falling knife after dropping 10% today?

Aggreko. Fair use.

One of the challenges facing all companies is how to cope with difficult trading conditions. Power solutions company Aggreko (LSE: AGK) has recorded a share price fall of almost 12% so far today, after experiencing a tough operating environment in 2016. While this has clearly caused disappointment for the company’s investors, it could represent a sound buying opportunity.

Recovery potential

Perhaps the most surprising aspect of today’s results is that full year pre-tax profit is in line with market expectations. While revenue declined by 3% and pre-tax profit was 12% lower at £221m, this was forecast prior to the company’s results release. Investor sentiment seems to have been hurt by the future prospects for the business in what remains a difficult operating environment.

For example, a low oil price affected a number of Aggreko’s markets, notably North America. This situation could continue in the short run, since the prospects for the oil industry remain uncertain. However, the company is attempting to turn its performance around. It is on track to implement cash savings across the group in excess of £100m, while it is also investing in new technology. Furthermore, a new customer relationship management system has been introduced as part of a broader digitisation and this could help to boost the company’s future financial performance.

Growth potential

In fact, Aggreko is expected to record a rise in its bottom line of 3% in the current year. This is forecast to be followed by growth of 9% next year. Therefore, while its performance in 2016 and in prior years was disappointing, it may offer capital growth potential if investor sentiment improves due to a turnaround in its financial performance.

In terms of the size of potential gains, Aggreko’s average price-to-earnings (P/E) ratio in the last four years has been 16.7. Today. It now trades on a P/E ratio of just 14.7. This means that if its rating reverts to its long-term average and it meets its forecasts for the next two years, the company’s shares could rise by as much as 24%. And with the long-term outlook for the oil industry being relatively positive, now could be a prudent time to buy a slice of the business.

Higher growth option

While Aggreko may have turnaround potential, sector peer HSS Hire (LSE: HSS) could be an even more enticing growth play. The hire company is forecast to record a rise in its bottom line of 85% in the current year, followed by growth of 58% next year. Despite such a high growth rate, it trades on a price-to-earnings growth (PEG) ratio of just 0.2. This indicates that there is significant upside potential on offer over the medium term.

Certainly, a potential slowdown in the UK economy could slow HSS Hire’s progress down somewhat. However, the prospects of Brexit-induced falls in the economic growth rate already appear to have been more than fully factored in to the company’s valuation.

So, while Aggreko could rise by 24% or more, HSS Hire could deliver vastly higher capital gains in the long run.

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Peter Stephens 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.