Buying shares in companies which have experienced a challenging year could be a sound means of recording high returns in the long run. Certainly, there is a risk that trading conditions remain tough. But, there is also the potential for a higher valuation as well as rising profitability in future years. With that in mind, here is a value stock which is currently experiencing a difficult period. It has the potential to gain over 20% within two years.
A tough 2016
High technology manufacturer Senior (LSE: SNR) experienced a challenging 2016. Its results show a fall in revenue of 2%, while adjusted operating profit declined by 28%. The land vehicle and industrial markets remained subdued during the period. However, they were offset to some extent by continued good organic revenue growth in large commercial aerospace. This helped to lessen the fall in the company’s bottom line, although even on an adjusted basis it was 31% lower when compared to 2015.
In response, Senior plans to streamline its business. This will affect 2017’s financial performance and as a result of this, its shares have declined by over 3% today. However, the restructuring should lead to greater efficiencies and potentially improved profitability in future years. And with new programmes and products expected to enter production from 2018, it anticipates a margin recovery as cost savings begin to impact on its financial performance.
Valuation
In fact, Senior is expected to record a rise in its bottom line of 3% this year and 10% next year. This shows that there could be an improvement in investor sentiment towards the company, which may lead to a higher rating being applied by the market. Currently, the company trades on a price-to-earnings (P/E) ratio of 12.6. This is low when compared to its historic average rating of 13.7 during the last four years. If the stock’s P/E ratio reverts to its mean and it meets its guidance over the next two years, its shares could be trading around 24% higher than their current level.
Outlook
Of course, Senior is not the only industrial company which is expected to record improved performance. Sector peer Cobham (LSE: COB) is forecast to deliver a fall in its bottom line of 7% this year, but then it is due to follow this up with growth of 16% in 2018. This could represent a step change in the company’s fortunes and lead to a higher valuation. And since Cobham trades at a discount to its historic average P/E ratio of 13.6, a potential share price gain of 16% by 2019 is on the cards.
Certainly, both stocks are relatively risky. They operate in industries where trading conditions are challenging and their earnings growth is negative at the present time. However, they also offer wide margins of safety and significant upside, which could allow them to outperform the wider index. In this respect, Senior appears to have greater upside than Cobham. This makes it the superior buy at the present time.
