Here are three recovery plays that could put a smile on your face in the next couple of years.
Below are three stocks that could stage a recovery if the economy is emerging from recession as some predict. However, I'd strongly advise that you examine their report and accounts closely and conduct further research before investing.
AEA Technology
AEA Technology (LSE: AAT) specialises in environmental and energy consultancy and is currently trading at 22.75p a share. On Thursday it announced full year pre-tax profits of £7.5 million, down from the previous year's total of £8m. However, earnings before interest, tax and amortisation (EBITA) was up 9% to £12m, while turnover at £93.7 million was up 16% on the previous year.
Over the past two years AEA's share price has fallen like a stone from a high of almost 120p. Part of the reason for this was a 40p rights issue to buy US-based Project Performance Corporation in 2008 for £40 million. That said, the purchase appears to be driving business in the US and the shares have risen over 45% over the past three months.
Order flow from the US and UK governments has been hit by the recession but, in the medium term, AEA hopes to benefit from the 'Barack Obama effect' which should produce increased spending on environmental consultancy in the US. It's felt the Climate Change Bill will do the same here in the UK.
AEA has a market cap of just £55 million, while its net debt has risen 40% to £27.3 million, reflecting the companies acquisition of PPC and the associated hedging strategy, which adjusts with currency rate changes. However, the company has up to £47m of banking facilities in place to cover anticipated funding requirements.
AEA also has a large pension deficit of £108m, which reflects the fact that assets in the pension scheme are heavily invested in equities (which were at a particular low point at the latest time the scheme was valued). That said, it has come to an agreement with its pension trustees on a schedule of employer contributions to clear the deficit over 20 years.
Underlying trading appears sound and with increased environmental regulation driving demand for more consultancy in both the US and UK the company appears well placed to benefit.
French Connection
Fashion retailer French Connection (LSE: FCCN) made a large pre-tax loss of £17.4 million for the year to 31 January 2009. This included an impairment writedown of £11.9 million relating to a US business acquired in 2001. If you were to strip this writedown out the loss was £5.5 million.
With its shares at 60p, it has a market cap of approximately £58 million. From its latest set of accounts, its net current asset value was £79.9m on 31 January 2009 (which equates to 83p a share).
Since then, however, its cash balances have reduced by £17.1m to £20m (equivalent to approximately 21p a share), as reported in an interim management statement issued on 20 May.
While French Connection made a loss for the full year, and its business is still suffering the effects of the recession on both sides of the Atlantic, I am hopeful that on news of restructuring or significant cost-cutting its shares could rise much further.
For the time being it appears to have plenty of cash and, barring a further significant downturn in trading, the share price should pick up given a two-year window. Yet, as any recovery is not assured, this needs careful monitoring. I'll be watching its next set of results closely before deciding on any purchase.
Vislink
Over the past three years, Vislink's (LSE: VLK) share price has dropped from a high of 107p to 28p.
In 2008, the secure communications specialist saw revenue remain fairly flat at £101m (2007: £98.5m) with profits down from just under £14m to £585,000. Operating profit before the amortization and impairment of goodwill and acquired intangibles, share-based payments and other exceptional costs was £9.1 million (2007: £15.8 million). The main reason for this drop was that operating margins declined.
A reorganisation of the Group into the four Business Units (News and Entertainment, Law Enforcement and Public Safety, Marine and Energy and Services) has been completed but earnings visibility remains a little unclear.
Vislink is instituting cost-cutting measures in both its operations and in R&D. Management expect the benefits of this to be seen in the latter part of 2009 and the first half of 2010.
The company is scheduled to announce its half-year results on 26 August. I wouldn't be surprised if the shares fell after these figures, which could present a possible buying opportunity depending on the progress it has made in increasing revenues and operating margins.
More from Chris Menon:
> Chris owns shares in Vislink
