2015 has been a very challenging year for investors in Anglo American (LSE: AAL) with the mining company’s share price falling by 76% since the turn of the year. Looking ahead, many investors expect more pain ahead – especially since the company’s bottom line is due to fall by 54% in the current year and by a further 36% next year.
Clearly, there’s scope for a further fall in the company’s valuation in the short run but longer term, Anglo American could become a profitable investment. That’s at least partly because it has refreshed its strategy in an attempt to become a more efficient and leaner business. It’s set to focus on three of its highest quality divisions over the medium-to-long term.
Furthermore, Anglo American’s financial standing appears to be stronger than for many of its resource-focused peers. For example, its net debt guidance was unchanged in its recent Q3 results despite price deterioration. And with dividends having been suspended until the end of 2016, it appears likely to survive the present difficulties – especially with capex being slashed in a bid to protect the company’s balance sheet.
In addition, Anglo American now trades on a forward price-to-earnings (P/E) ratio of just 8.5 and this indicates that there’s upward rerating potential. Clearly, its near term future depends on commodity prices but for less risk-averse long term investors, it could prove to be an excellent recovery play.
Appealing valuation
Meanwhile, shares in engineering data and design IT systems company Aveva (LSE: AVV) have fallen by around a third today after it announced the termination of talks to acquire industrial software assets from Schneider Electric. The acquisition stalled due to significant integration challenges being identified during the due diligence process that Aveva felt couldn’t be overcome without considerable risk and cost. This was exacerbated by the complex nature of the prospective transaction and as a result, Aveva decided that the risk/reward ratio from the deal was unappealing.
Although today’s news is disappointing, Aveva remains a high quality business that’s trading in line with expectations. Furthermore, today’s share price fall appears to be the result of overzealous investor sentiment during 2015 that saw Aveva’s shares bid up to a very high level. They were up as much as 77% at one point this year. As such, even after today’s fall, they’re still up 9% year-to-date. While their valuation is now much more appealing, Aveva still appears to be somewhat overpriced given its growth prospects.
For example, Aveva trades on a P/E ratio of 20.5 and with its bottom line due to rise by 7% next year, this puts it on a relatively unappealing price-to-earnings growth (PEG) ratio of 2.9. As such, it appears to be a stock to watch, rather than buy, at the present time.
