All companies have periods where their financial performance is somewhat disappointing. That is just the nature of business and, while it can mean a fall in the company’s share price in the short term, it can also lead to major changes at the company which puts it on a stronger footing for the long term. And, for investors willing to take a risk on such a stock, the rewards can be hugely enticing.
For example, AstraZeneca (LSE: AZN) has endured a torrid time in recent years, with a number of its key, blockbuster drugs losing their patent protection. This has led to falling sales as generic competition grabs market share and, as a result, AstraZeneca’s top line has fallen from just under £22bn in 2011 to a forecast of less than £16bn in the current year. And, while cost cuts and efficiencies have been made, AstraZeneca’s earnings have also tumbled by over 40% during the same time period.
However, AstraZeneca has made major changes to its business so as to position itself for future growth. Notably, it has engaged in considerable M&A activity, which has boosted its pipeline and caused market sentiment to improve as investors begin to factor in potential earnings growth from 2017 onwards. Furthermore, AstraZeneca has shifted its focus towards treatments for conditions such as diabetes that offer huge growth potential in the coming decades, thereby setting the company up for upbeat ultra-long term growth potential.
Despite its share price having risen by 49% since the start of 2013, AstraZeneca still offers excellent value for money. For example, it trades on a price to earnings (P/E) ratio of 15.7 and has a dividend yield of 4.2%; both of which indicate that now is a great time to buy a slice of the pharmaceutical play.
Similarly, BHP Billiton (LSE: BLT) has also endured a challenging period, with the prices of commodities tumbling and causing its earnings to decline by 52% last year. And, in the current year, they are forecast to fall by a further 33% which, in the short run, could hurt investor sentiment.
However, with BHP spinning off non-core assets, cutting costs and generating efficiencies, it appears to be addressing the challenges which it faces. This, in the long run, could leave it in a stronger position relative to its peers and lead to much improved profitability in the coming years. Certainly, a P/E ratio of 20.8 is hardly cheap but, for one of the largest and best diversified mining stocks in the world, it appears to be a price worth paying for sound long term growth prospects.
Meanwhile, Imagination Technologies (LSE: IMG) today announced a profit warning for the first half of the current year. It is blaming a slowdown in the semiconductor sector, with reduced demand from emerging markets being a key cause. As such, it expects to post a loss in the first half of the year. And, while the company expects the second half of the year to be a major improvement, it has stated that it may not fully offset a tough first half of the year.
Due to the profit warning, shares in Imagination Technologies are down by over 10% today. Clearly, this is disappointing for the company’s investors but, realistically, it is most likely to be a weak six-month period rather than the start of a prolonged period of decline. Furthermore, with Imagination Technologies being forecast to increase its earnings at a double-digit rate next year, it remains a very enticing growth stock which, for long term investors, is now trading at an even more appealing share price.
Peter Stephens owns shares of AstraZeneca and BHP Billiton. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.