With many experts predicting a stock market crash on the horizon, there is no shortage of fear.
Many have looked at the steep rise in interest rates, stubborn inflation data, and mixed forward guidance from companies, concluding that the 2022 downturn was just the beginning.
Market cycles are normal, and even during recessions, not all companies will struggle. I want to look at three companies that have the fundamentals to succeed in any environment.
J Sainsbury
Chances are most will have encountered some of the 800 stores operated by J Sainsbury (LSE:SBRY).
Founded in 1869, it contains three segments:
- Food;
- Merchandise and Clothing;
- Financial Services.
Regardless of the economy, people need basic food and domestic products. With strong fundamentals, a generous dividend of 5.25%, and substantial customer base, J Sainsbury looks a compelling all-weather company.
A 10.4x price-to-earnings (P/E) ratio is excellent value compared to main rival Tesco at 19.1x. A discounted cash flow calculation suggests 33% upside to fair value of 350p from the current price of 263p.
However, the earnings and revenue growth of the company is below the sector average. This suggests that substantial returns are unlikely in the near term, but I like the long-term growth prospects.
Kier Group
Historically, governments often look to stimulate growth via infrastructure. Long lead-in times also mean that financial downturns have a limited effect on contract awards.
Kier (LSE:KIE) provides infrastructure and construction services internationally . Such developments have recently been prioritised by governments, passing legislation and campaigning around infrastructure improvements.
The P/E ratio is notably higher than the sector average, 26.2x vs 11.1x, but considering the discounted cash flow, fair value of 179p is 38% higher than the current share price of 75p.
Future earnings growth of 34% dwarfs the industry average of 4.5%. This indicates a company increasing efficiency despite tough financial conditions.
However, annual profit margins have dropped from 0.7% to 0.4% since 2021. Margins within the sector are notoriously thin. If external factors reduce the ability to deliver projects, then the company could face challenges.
Medica Group
The clearest example of a sector with consistent demand is healthcare. Treatment is an unavoidable necessity for a growing and ageing population, resulting in an increasing need for cost-effective innovation.
Medica (LSE:MGP) provides teleradiology reporting services to NHS trusts, private hospital groups, and diagnostic companies in the UK, Ireland, and USA. The company delivers essential services, as well as pioneering AI imaging.
The company is profitable, often rare within innovative healthcare. Medica sits 89% below its fair value of 301p at 159p when calculating discounted cashflow, suggesting growth is not fully priced in. Short- and long-term debt levels are manageable, dividends are well covered by cash flows, and profit margins are growing. With similar growth estimates to the industry of 19%, the company looks to have a sustainable future.
Despite the healthy fundamentals, the company has a relatively expensive P/E ratio of 26.9x. This may reduce investor enthusiasm since several competitors offer similar growth levels for cheaper valuations.
Overall
The three companies discussed all have one key thing in common. They are all in high demand regardless of whether recession hits in 2023. By buying undervalued companies with solid fundamentals and positive forecasts, I can worry less about the prospect of a stock market crash.
