Share prices often rise steadily following upgrades to analysts’ profit forecasts. In today’s article I’ll look at three stocks that could benefit from an improving outlook in 2016.
Sainsbury
Supermarket J Sainsbury (LSE: SBRY) remains unique among the big three listed UK supermarkets.
Unlike its two listed peers, the firm has delivered stable and profitable results that have seen analysts increase their earnings forecasts for the 2015/16 financial year. Sainsbury now trades on a forecast P/E of about 12.5, and offers an above-average forecast yield of 3.9%.
Debt levels remain relatively low, with gearing of less than 20%. Asset backing is also good. At 275p, Sainsbury’s shares trade at a 10% discount to their last reported tangible net asset value of 305p per share.
Of course, there’s still the question of the Home Retail Group acquisition. I’ve mixed views about this. Home Retail may be one reason why Sainsbury’s shares look relatively cheap.
We should find out more about whether Sainsbury intends to pursue the deal in the face of a higher potential offer from Steinhoff later this week.
But I think Sainsbury is likely to remain a buy.
Lonmin
At first glance, South African platinum miner Lonmin (LSE: LMI) appears to tick all the boxes for a risky investment. Not only is the firm’s profitability uncertain, but its share price has risen by 300% from January’s 52-week low!
Despite this, I’m continuing to hold my shares. I think the outlook could be brighter than it seems.
In its latest update, Lonmin confirmed that it’s on course to achieve guided operating costs of R10,400 per platinum group metal (PGM) ounce for the full year. The firm also reported an average PGM basket price of R10,859 per ounce for October-December 2015.
Since then, the price of platinum has risen by around 5%. The US dollar has also weakened slightly, and the benefits of Lonmin’s restructuring plan should have continued to help reduce the firm’s costs.
I believe that all of these relatively small gains could combine to help Lonmin return to profitability sooner than expected. City forecasts currently indicate a full-year loss in 2016 and 2017.
However, forecasts for 2016 have risen steadily since November. I reckon there could be more to come.
Costain Group
Construction and engineering firm Costain Group (LSE: COST) is beneath the radar of many investors, but I think it has some very attractive qualities. The group’s recent results showed that operating profit rose by 16% to £33.2m last year. The dividend was also increased by 16% to 11p per share, giving a yield of 3.1%.
More than 90% of Costain’s order book is made up of contracts where the client is responsible for reimbursing all costs. This should provide some protection from painful cost overruns.
The group also focuses increasingly on managing complex long-term projects. It’s hoped this will improve profit margins and smooth out cyclical downturns.
Costain’s clients appear happy with the group’s approach to business. More than 90% of Costain’s order backlog is with repeat customers.
City analysts expect earnings per share to rise by 22% in 2016, putting the shares on a forecast P/E of 13.5 and a prospective yield of 3.5%. The group looks well positioned to deliver further steady growth, in my opinion.
