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Why I’m Bullish On AA PLC, Auto Trader Group PLC And Rockhopper Exploration Plc

Shares in roadside recovery and insurance company AA (LSE: AA) have fallen by over 10% today after it reported a fall in revenues in the first half of its financial year. In fact, its top line fell from £491m in the first half of 2014 to £484m in the corresponding period of this year, a drop of 1.4%.

The key reason for the fall in sales was weakness in AA’s insurance business and, with a rise in Insurance Premium Tax (IPT) set to come into effect in the coming months, it could endure a further challenging period ahead. Still, the roadside recovery division posted a rise in revenue of 2.1%, with a key reason for this being improved customer retention. And, while the company’s top line fall is somewhat disappointing, it remains on-track to meet full-year expectations.

This means that AA’s net profit is due to decline by 5% in the current year but, looking ahead to next year, the company is forecast to post a rise in earnings of 26%. This puts it on a price to earnings growth (PEG) ratio of just 0.5, which indicates that its shares offer upbeat growth prospects at a very reasonable price. Furthermore, with dividends expected to soar by 23% next year, AA could be yielding as much as 3.5% from shareholder payouts that are covered a healthy 2.6 times by profit.

Despite today’s share price fall, AA is still up 24% since it listed in June 2014. Car sales company Auto Trader (LSE: AUTO) is up by the same amount since it began trading on the stock market in March of this year. However, there could be much more growth to come, since Auto Trader remains a market leader with a distinct competitive advantage.  

Certainly, there are other places to find used cars, but for many people Auto Trader is the default option. This provides it with a degree of customer loyalty (since people often change their car every few years) and, therefore, means that it has a relatively reliable earnings stream.

Looking ahead, Auto Trader is forecast to increase its net profit by 178% this year, followed by further growth of 17% next year. This puts it on a PEG ratio of just 0.2, which indicates that its shares are a bargain.

Meanwhile, oil exploration company Rockhopper (LSE: RKH) also has a very bright future. The oil price fall may have dampened sentiment in the sector somewhat, but with it enjoying drilling success at its joint venture off the Falkland Islands during the course of 2015, Rockhopper is still on-track to become a very profitable producer in the medium to long term.

Furthermore, and unlike a number of its exploration peers, Rockhopper has more than just one main asset. For example, it is aiming to shortly begin production at its assets in the Mediterranean, while further drilling lies ahead for its part-owned assets off South America. This reduces overall risk for investors and, while the future is somewhat uncertain due to the outlook for oil, Rockhopper offers growth potential and good value, with its shares trading on a price to book value (P/B) ratio of only 0.77.

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