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Why I Would Buy Cobham plc But Sell Ophir Energy Plc And Xaar plc

Today I am looking whether these three market movers are attractive investment candidates.

Cobham

Shares in defence play Cobham (LSE: COB) have endured a disappointing end to the week and were recently 3.3% lower on the day. Still, improving investor confidence in the firm’s key markets has seen Cobham’s stock price surge by almost a quarter in just over three months.

And with good reason: the company’s role as a major supplier to the US and UK militaries is expected to push defence revenues higher from this year as economic conditions in these territories improve. On top of this, Cobham is a major player in the lucrative commercial aerospace market and derives almost four-tenths of total revenues from this sector.

Boosted by recent acquisitions like that of US rival Aeroflex, I believe that the company is in great shape to latch onto rising demand for new planes, as commercial air traffic continues to rise and profitability across the airline sector heads through the roof.

Following two years of expected earnings losses — the business is anticipated to follow 2013’s decline with an additional 9% drop last year — City analysts predict that Cobham will start firing again from this year onwards, and have pencilled in advances of 11% and 7% for 2015 and 2016 correspondingly.

Consequently Cobham deals on a P/E multiple of 15.5 times prospective earnings for the current 12 months, and which dips to just 14.5 times for 2016 — any reading around or below 15 times is widely considered sterling value for money.

Ophir Energy

Unlike Cobham, shares in Ophir Energy (LSE: OPHR) have seen prices jump in Friday business and the firm was recently trading 4.6% higher. But while I consider the aeroplane builder to be a terrific growth selection, I believe that continued pressure in the oil market makes Ophir Energy a perilous proposition.

Like the rest of the oil sector, Ophir Energy has been crushed by a deteriorating fossil fuel price and has seen shares fall 43% since the Brent benchmark’s 2014 peak last June. The fall has not been as pronounced as that of other exploration plays due to the firm’s bulky cash pile, however, which is helping it to hoover up industry rivals like Salamander Energy as well as assuage fears of possible bankruptcy in the near future.

While it could be argued that purchases like that of Salamander Energy late last year — a move which gives Ophir Energy terrific exposure to South-East Asia — significantly boosts the firm’s earnings profile at bargain-basement prices, an extended period of weak oil prices could mitigate any positive impact of these moves and put profitability at the firm under extreme pressure.

Xaar

Due to signs of prolonged cooling the Chinese construction market, I believe that specialist printing play Xaar (LSE: XAR) is at huge risk of prolonged earnings weakness, a fear seemingly shared by the wider market — shares in the business were recently 3.6% lower from Thursday’s close.

Xaar gave the market some reason for cheer in December when it reported that sales of ceramic tiles — a sector from which it sources around two-thirds of all sales — had stabilised during October-December. Still, the company warned that revenues are expected to remain subdued during the medium term at least, and does not expect turnover to breach the £100m mark in 2015.

Subsequently the number crunchers expect Xaar to follow up an expected 44% earnings slip in 2014 with an additional 36% slide in the current 12-month period, leaving the business dealing on a hugely-unappealing P/E ratio of 21 times forward earnings.

Although a 19% rebound is anticipated for 2016, Xaar still carries a poor earnings multiple of 17.8 times for this period. Given the fragile conditions in its core markets and poor forward visibility, I believe that the printing specialist is a risky stock selection.

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Royston Wild 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.