It’s been a tough few weeks for investors in companies such as Serco (LSE: SRP), Next (LSE: NXT), Supergroup (LSE: SGP) and Rolls Royce (LSE: RR), with all four companies releasing profit warnings over the last month.
Of course, the reasons for (and severity of) those profit warnings vary wildly. However, all four companies saw a sharp fall in their share prices in the period following the announcement that results for the full year would be behind previous guidance.
Looking ahead, though, can they turn things around in 2015? And, does the present time represent a superb buying opportunity for canny investors?
Warm Weather
While the unusually warm weather in September and October has been good news for many people in the UK, with the summer lasting a little but longer than expected, it has been awful news for clothing retailers such as Next and Supergroup. Indeed, having filled their stores and warehouses with outerwear, such as coats, jackets and warm jumpers, there has been very little demand for such items in recent weeks. That’s simply down to UK consumers not needing to wear such items and, as a result, they have not been buying them.
So, while the share prices of Next and Supergroup have underperformed the FTSE 100 over the last month (Next is up 1%, while Supergroup is down 16% versus a 4% gain for the FTSE 100), they both could be well worth buying at the present time. Indeed, with price to earnings growth (PEG) ratios of 1.2 (Next) and 0.8 (Supergroup), they seem to offer excellent value for money for longer term investors.
Weak Demand
In the case of Rolls Royce, its profit warning was due to weak demand in its key markets. While it stated that it was confident of a pickup in demand for its main aircraft engine business, customers in the oil and gas, mining and industrial sectors were delaying or cancelling orders. As a result, the company is expecting to post earnings numbers that are 3% lower than last year, with 2015 set to see further declines of 1%.
Despite this, Rolls Royce could prove to be an excellent investment. While it has limited control over levels of demand for its products, it appears to be taking the right steps to become more efficient and cut its cost base. Furthermore, it offers good value for money, with shares trading on a price to earnings (P/E) ratio of 13.7 (versus 14 for the FTSE 100). As such, it could make for a highly profitable investment, although sentiment could remain underwhelming in the short term as demand for its products remains relatively weak.
A Fourth Warning
Meanwhile, Serco today released its fourth profit warning of 2014, with the outsourcing company again reducing its guidance for the full year and sending its shares spiralling downwards by 30%. Furthermore, it announced plans to suspend its dividend, as well as an intention to enter into a rights issue for £550 million and sell off non-core assets. It has also made write downs of £1.5 billion after a forensic accounting investigation ‘encouraged much turning over of stones’ according to CEO, Rupert Soames.
Although Serco remains profitable and has the capacity to turn its fortunes around, it seems as though things could get worse before they get better. Indeed, its reputation continues to decline, with the so-called ‘tag-gate’ episode still hanging over its head, as well as controversy surrounding a detention facility in Australia. As a result, revenue growth may prove to be more difficult than is currently being priced in.
While Serco trades on a P/E ratio of just 12.5, there seem to be better value (and less risky) companies that could turn things around in 2015. Rolls Royce, Next and Supergroup are three prime examples that could prove to be winning plays over the medium to long term.
