Long-term investors should be viewing the market sell-off since the New Year as an opportunity to snap up shares of well-run companies that have been unfairly dented by broader market panic. Blue chip companies such as Shire (LSE: SHP), HSBC Holdings (LSE: HSBA) and Rolls-Royce Holding (LSE: RR) have all seen share prices tumble in the first weeks of 2016. Is now the time to build a position in any of them?
Overpaid or fair price?
Shire share prices have been knocked down by 10% over concerns that it overpaid for American pharmaceutical company Baxalta. Shire’s long courtship of Baxalta eventually ended with a $32bn price tag, 60% in stock and 40% cash. The combined company will become a market leader in rare diseases, a highly lucrative field combining sky-high margins, little competition and fast-track approval from regulators.
While this deal is larger than any previous Shire purchases, management has proven its ability to integrate and wring value out of previous acquisitions. Expanding Shire’s portfolio away from an over-reliance on attention deficit disorder treatments into haematology and oncology drugs makes good sense. Although the efficiencies to be found by combining the two companies may be over-stated, the long-term potential for Shire as a world leader in rare drugs is very appealing. Shares now trade at 11 times earnings and with management targeting over 50% revenue growth for the combined company by 2020 and continued margin increases, I believe now is the time to begin viewing Shire as an appealing investment.
Bargain buy
Emerging markets troubles have knocked HSBC share prices down by 30% over the last five years. CEO Stuart Gulliver has wisely decided to sell of Brazilian and Turkish assets, promised some $5bn in cuts over the next two years by axing 50,000 jobs, and refocused assets on the highly profitable Asian divisions. The shift back to Asia makes a great deal of sense for the Hong Kong-based bank. Although the Chinese economy is making headlines for its slowdown, the shift from an industry-led to services-led economy will open up further opportunities for HSBC’s retail credit and wealth management products targeted to a growing middle class.
HSBC shares currently trade at nine times next year’s earnings and the price-book ratio for the company is a mere 0.75. Combine an attractive valuation, long-term potential, and the company’s well-covered dividend currently yielding just shy of 7%, and I believe investors have a bargain buy that could grow for decades to come.
Long road ahead
Rolls-Royce faces a longer road to recovery than HSBC, but has the potential to grow significantly from its current low base. The company is in a strong position in its traditional civil aerospace division due to a duopoly with GE in the lucrative wide-body aeroplane engine market. Rolls suffers from lower margins than GE as it still outsources much of its supply chain (an issue GE tackled by buying suppliers and turning to in-house 3D manufacturing). The long-term outlook for the wide-body engine market is excellent as airlines globally buy new fuel-efficient, long-haul aircraft.
If CEO Warren East, who successfully ran ARM Holdings for several years, can tackle supply chain costs and internal inefficiencies, then Rolls could be primed for significant growth for investors. The shares may fall further in the short term, but I believe Rolls could see that growth in the years to come.
