Irrespective of a company’s past financial performance, investors can always get excited about an improved outlook. In other words, even if a company has endured a highly challenging period and has seen its bottom line fall in previous years, its share price can rise so long as improved performance is just around the corner.
That’s a key reason why I’m bullish on Rio Tinto (LSE: RIO) (NYSE: RIO.US). It has endured a hugely difficult period, with external factors severely affecting its financial performance. In fact, its bottom line is set to fall this year to just 30% of its 2013 level, which provides evidence of just how hard the company’s income statement has been hit by an iron ore price that it at or near to a ten-year low. And, despite Rio Tinto cutting costs and increasing production, it has a tough outlook for the next six months, too.
However, next year is set to be a lot different than 2014 and 2015. That’s because Rio Tinto is forecast to increase its earnings by 15% and, with its shares trading on a price to earnings (P/E) ratio of 16, there is considerable scope for them to be rerated upwards by the market. Clearly, guidance could change depending on the price of iron ore, but with a price to earnings growth (PEG) ratio of 0.9, Rio Tinto appears to have a sufficiently wide margin of safety to offer a very favourable risk/reward profile.
Similarly, engineering company, Keller (LSE: KLR), is expected to post strong growth numbers moving forward. However, rewind the clock back to 2010/2011 and the company was posting severe declines in its bottom line, with it falling by 44% in both years. However, since then it has seen its earnings treble and, looking ahead, it is forecast to increase its bottom line by almost a third over the next two years.
As with Rio Tinto, Keller trades on a low PEG ratio, with it being just 0.8. And, while its shares have already risen by 23% year-to-date, there remains significant scope for them to continue their rise over the medium term.
Meanwhile, Sports Direct (LSE: SPD), has had a much more stable recent past. Certainly, it became a political ‘hot potato’ for a while during the General Election campaign when the Labour party used it as an example of the apparently unfair nature of so-called zero-hours contracts. And, while sentiment dipped during that period, Sports Direct has been able to deliver double-digit earnings growth in each of the last four years.
Looking ahead, the company is set to continue this level of performance and, while it trades on a PEG ratio of 1.7 (which is modestly high), its reliable growth profile and scope to expand into other areas (such as gyms and also abroad) mean that it seems to be very worthy of its premium price tag. As such, the 12% share price appreciation of the last three months looks set to continue over the medium to long term.
