Could these growth duds be on the cusp of a stunning recovery?

Royston Wild discusses two stocks predicted to bounce back very soon.

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Xaar’s (LSE: XAR) share price was still on the offensive in Wednesday business. The stock was 2% higher following a positive reception to latest financials and news of a development accord with a North American heavyweight. The business was last at levels not seen since January, rising above 400p.

The digital inkjet printing powerhouse declared that trading came in as expected between January and June, with sales for the period predicted at around £44m.

And affirming the guidance made in March, Xaar said that “revenue will be more second half-weighted than usual with growth anticipated from recently introduced new products.”

In other news, the Cambridge firm announced it had signed a joint development agreement with Xerox that will see the two “develop together the next generation of industrial bulk piezo printheads using the extensive combined resources and IP of both companies.”

Both tech giants will benefit from the use and commercialisation of the resulting products, Xaar noted. And chief executive Doug Edwards added: “Through sharing the R&D investment in the next generation bulk piezo platform, the company will make savings which we will deploy into our sales and marketing function, as we continue to transform the business from an internally focused product company to a market- and customer-centric business.”

Back in business?

But those seeking an immediate earnings explosion should look somewhere other than Xaar. The business has endured three successive annual falls and another hefty reduction, this time by 43%, is forecast for 2017.

However, the business is expected to rebound with a 36% advance in 2018, the company’s huge collection of recently-launched products set to light up the bottom line. And with the company also likely to remain on the hunt for acquisitions — net cash stood at a healthy £49.3m as of December — I reckon Xaar could deliver sustained, and delicious, earnings expansion long into the future.

While a forward P/E multiple of 32.3 times may be expensive on paper, I reckon the stock’s vastly-improved sales outlook makes it worthy of such a handsome rating.

Not quite there

Aggreko (LSE: AGK) is another London-listed stock expected to endure some near-term earnings turbulence.

Like Xaar, the power systems rental play has seen earnings shuttle lower for many years now, and an extra 6% fall is predicted for 2017 as trading troubles in Argentina persist. Still, the City expects this year to represent the last year of profits pain, and a 12% rebound is anticipated for 2018.

I am not so convinced, however. While Aggreko’s core Rental Solutions division has seen revenues from the North American fossil fuel sector stabilise more recently, there are signs that the supply glut that is currently putting crude prices on the defensive again. This scenario is persisting for much longer than anticipated and could see sales come under pressure again.

Other than this Aggreko is actually performing well. Indeed, revenues at Rental Solutions rose 8% in January-March excluding oil and gas. And revenues at its Power Solutions unit moved 17% higher.

A forward P/E ratio of 14.5 times is attractive on paper, but not low enough to encourage me to part with my cash. I believe Aggreko is still not out of the woods.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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