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3 To Research Right Now: Rolls-Royce Holdings PLC, SABMiller plc & Dignity Plc

FTSE100There’s nothing like a decent ‘shark-fin’ stock market correction to get the old value-receptors twitching.

Often, a gradual arcing recovery follows a steep plunge in the FTSE indices generating a chart-shape resembling the aforementioned ocean hunter’s dorsal appendage. It seems likely that share prices will rebound this time — once the bottom is in (tangentially, did you know that many sharks possess an anal fin, too, although that can’t help us understand our investments?).

A time for buying

Although we can never recognise a trend change until after it has happened, the share prices of many large companies rose over the last few days. There’s a good chance that stock markets are turning up.

Now seems like a good time to buy shares in firms with the most promising business models and the slickest operations. Let’s revisit some of the London markets top-notch operators to see if all the recent scary headlines have knocked enough foam from valuations to justify a purchase.

Power system engineering

Iconic British manufacturer Rolls-Royce Holdings (LSE: RR) is best known now for producing engines. The firm powers some of the world’s biggest airliners and advanced military aircraft, and makes low-emission power systems for ships, critical equipment and safety systems for the nuclear and offshore industries.

In an update on 17 October, Rolls-Royce revealed that, over the last few months, economic conditions deteriorated and Russian trade sanctions tightened causing some customers to delay or cancel orders. Rolls-Royce is working hard to control costs, but such adverse trading conditions mean the firm expects revenue in 2014 to fall between 3.5% and 4% compared to 2013.

The shares are down around 37% from the high of 1300p or so they achieved at the beginning of the year. Today, we can buy into Rolls-Royce around the sum of 814p per share. Yet, although there is some cyclicality in the industries the company serves, as we are seeing now, Rolls-Royce enjoys a good record of trading progress, driven by quality engineering:

Year to December

2009

2010

2011

2012

2013

Revenue (£m)

10,414

11,085

11,124

12,161

15,513

Net cash from operations (£m)

859

1,340

1,306

1,255

2,040

Adjusted earnings per share

39.67p

38.73p

48.54p

59.59p

65.59p

Despite a setback now, Rolls-Royce’s business could bounce back with its share price, so we could be seeing a decent value opportunity now.

The forward P/E rating is running below 12 for 2015, with forecasters expecting 8% earnings’ growth that year. There’s also a forward dividend of 3.1% with the payout covered almost three times by adjusted earnings. This is the lowest valuation seen on this British quality leader for some time.

Region-specific beer brands on a global scale

Although the share price has fallen back a bit at brewer SABMiller (LSE: SAB), the firm didn’t seem to be worrying about much on 14 October.

In a market update, the company said it achieved resilient net producer revenue growth in the first half, powered by operations in Africa and Latin America. Weaker lager volumes in the second quarter brought down performance, but strong growth in soft-drinks sales had a balancing effect. Like many companies, SABMiller is feeling the squeeze from ongoing foreign currency movements, as well as from weaker second-quarter trading conditions in China and Australia.

It’s hard to get people to stop buying their favourite tipple, and that’s SABMiller’s great trading strength. The firm has an impressive record of rising cash flow and earnings, owing to the strength of its brands such as Miller Lite, Castle and Grolsch.

SABMiller keeps brands market-specific, catering for the tastes and preferences of different regions around the world. That approach powered the company from its South African roots to being one of the world’s leading brewers with more than 200 beer-brands and some 70,000 employees in over 75 countries.

Such performance comes at a price. Even after easing back, the shares at today’s 3373p value the firm on just over 19 times 2016 earnings. City analysts expect 10% growth in earnings that year, so this is no obvious bargain, despite being a firm of obvious quality.

Funeral-related services

Nothing seems more certain than the demand for funeral services. The potential for steady cash flow for Dignity (LSE: DTY), seems obvious. The firm aims to consolidate the undertaker industry, with a vibrant acquisition programme that seems to deliver decent financial results:

Year to December

2009

2010

2011

2012

2013

Revenue (£m)

185

199

210

230

257

Net cash from operations (£m)

37

40

38

50

55

Adjusted earnings per share

40.5p

46.4p

55.1p

62.8p

72.1p

The company’s shares appear unaffected by the recent market sell-off and have been range-bound for most of 2013 and 2014.

Forecasters expect earnings to increase by 12% during 2015 and, at a share price of 1538p, the forward P/E is running at almost 17. However, the company’s earnings’ growth record is one of the steadiest.

Dignity carries a lot of debt. Since the firm floated on the stock market during 2004, it has geared up to fund its acquisition programme. Borrowings run around six-and-a-half times last year’s operating profit.

It’s often best to purchase the shares of Top-notch companies such as Rolls-Royce Holdings, SABMiller and Dignity when fear drives the stock market down. Being brave on down days can pay off down the line.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.