Are you looking for mid-cap stocks with growth and income potential? Today, I want to look at two turnaround stocks from the FTSE 250 that are on my watch list at the moment. Is now the right time to start buying these companies?
A costly settlement
Aerospace group Cobham (LSE: COB) has been under a cloud since July when it revealed US customer Boeing was claiming damages relating to their KC-46 air-to-air refuelling tanker programme.
Cobham initially pencilled in a £40m charge relating to these problems, but today announced a further £160m of expected costs to achieve a final settlement. This is made up of an £86m payment to Boeing and £74m of extra costs to complete the programme.
Although this settlement is bigger than expected, Cobham shares edged higher today as investors welcomed the certainty it provides. The company can now move on and focus on its return to growth.
+30% in 2019?
Cobham’s settlement with Boeing will make a hole in the firm’s 2018 results. But with that bad news behind it, the picture looks much brighter for 2019.
City analysts’ forecasts suggest that if we ignore one-off costs like the Boeing settlement, Cobham’s earnings will rise by 30% in 2019. They’re also forecasting a return to dividend payments this year, although there’s a risk that today’s news could delay that decision.
Barring any other surprises, I think Cobham could deliver steady growth over the next few years. Although the shares don’t look cheap on 18 times 2019 forecast earnings, this ratio could fall rapidly if profit margins continue to improve. I rate the shares as a hold.
Power up for growth
Temporary power solutions provider Aggreko (LSE: AGK) makes money from renting out large generators to event operators, remote engineering sites and utility operators. It recently signed a deal to provide power for the 2020 Tokyo Olympics, for example.
The company’s growth ground to a halt back in 2012, since when the shares have fallen by nearly 70%. But this is still a large and profitable business, and City forecasts suggest profits may finally start rising again in 2019. As I’ll explain, I think the firm’s shares are starting to look too cheap to ignore.
A tempting valuation
I’ve been watching Aggreko for a while and am increasingly tempted to buy some for my own portfolio. During the first nine months of last year, underlying revenue rose by 11%. This figure strips out the impact of exchange rates and fuel costs that are passed on directly to customers, so it’s a useful guide to growth.
The last remaining drag on the business is the group’s Utility division, where hire demand is falling. However, this should be manageable and will reduce the group’s exposure to high-risk countries such as Zimbabwe and Argentina.
Chief executive Chris Weston expects pre-tax profit to be flat in 2018. City analysts reckon that this performance is likely to be followed by a 5% increase in earnings in 2019.
The shares currently trade on 14 times 2019 forecast earnings and offer a 3.8% yield. If Weston can return the business to growth this year, then I think the shares could perform well from this level.
