Shares in building supplies company Travis Perkins (LSE: TPK) have fallen by as much as 6% today after it released a profit warning. It now expects profit growth to be at the lower end of market expectations owing to challenging market conditions, with weaker than expected market demand being experienced in the third quarter of the year.
Encouragingly, though, Travis Perkins has made an improved start to the fourth quarter of the year and, while its third quarter performance was somewhat disappointing, it is making progress as a business. For example, it is continuing to outperform its key markets, is on-track to create and extend structural advantages as part of its five-year plan and modernise its IT and supply chain infrastructure. This means that, should the repair, maintenance and improvement market pick up in the coming months, Travis Perkins is well-positioned to take advantage of this.
Looking ahead, Travis Perkins is expected to increase its bottom line roughly in-line with the wider market in the current year and post above-average earnings growth next year. As such, its price to earnings (P/E) ratio of 15.3 appears to be fair and, with it positioning itself to take advantage of improvements in the outlook for the building supplies market, its bottom line growth rate could easily rise in the coming years. As such, and while its shares may come under further pressure in the short run, it appears to be very capable of rising by more than 20% over the medium term, although this is likely to come from a pickup in profit growth rather than a rerating.
Meanwhile, Centrica (LSE: CNA) has also endured a challenging period, with the weak oil price hurting the profitability of its exploration and production arm. Partly because of this, the company has decided to become a pure play domestic energy supplier and has commenced a vast restructuring which will see its oil and gas assets sold off alongside annual savings of £750m being made.
Not only do these changes have the potential to improve the company’s bottom line, they could also aid investor sentiment which has been weak in recent years. In fact, Centrica’s share price has fallen by 21% in the last year and now trades on a P/E ratio of only 13. This indicates that there is considerable upward rerating potential when many of the company’s utility peers trade on higher ratings. And, with Centrica having a yield of 5.2%, this is further evidence that a 20% share price rise is very achievable, since it would leave the company with a still very appealing yield of 4.3%.
Similarly, Shire (LSE: SHP) has the potential to deliver capital gains of over 20% and, with market sentiment being weakened recently by disappointment surrounding FDA approval for its dry eye drug, Shire now trades on a relatively appealing P/E ratio of 18.3. For a pharmaceutical company which is aiming to double its top line over the medium term, this appears to be rather low and indicates that an upward rerating is on the cards.
However, even if Shire is not rerated upwards, its earnings growth of 17% which is forecast for next year looks set to positively catalyse its share price. While M&A activity may also boost Shire’s share price performance, even on its own it appears to be a sound long term buy at the present time.
