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Are We Seeing A Golden Opportunity With GlaxoSmithKline plc, Rio Tinto plc And Castings plc?

Shares are down from recent highs at GlaxoSmithKline (LSE: GSK), Rio Tinto (LSE: RIO) and Castings (LSE: CGS) but the investment story remains compelling in each case. Are we seeing a good-value entry point for these shares right now?

An impressive set-up

Castings does what it says on its figurative tin. The firm makes iron castings. There’s something elemental about that — spitting fire, volcano-like running liquid metal, spitting and hissing, the boom and clang of lump hammers weilded by thick, hairy arms, and the sharp tang of honest industry in the air… I’m getting carried away, though. Today’s operation at Castings is a long way advanced from a competitor sand-and-muscle operation I spent a few days visiting several decades ago. The level of automation is impressive, as this company video demonstrates.

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There’s no doubt that a lot of investment went into Castings foundry enterprise, but that seems to be paying off. Today, the firm exports 80% of production, mainly to just a few vehicle manufacturers. Business has been good and the firm enjoys a strong balance sheet with cash in the bank and no debt. However, to survive future economic gyrations the firm needs financial strength now, as there must be a fair amount of cyclicality in the business.

Not to buy and forget

A 20% dip in profits for the year to March 2015 seemed to bring the share price down. After peaking at about 496p in the summer of 2014, the shares were down around 24% by the spring of 2015. However, City analysts following the firm expect earnings to bounce back by 19% during the current trading year followed by a further 9% uplift year to March 2017. The shares seem to be responding well and look set to resume the steady climb up that began during 2009.

The recent share-price action demonstrates the risk for investors of an out-and-out cyclical. Any smell of easing profits in the air will reverse share-price progress. Owning the shares now is fine if the economic up-leg continues, but I wouldn’t want to be holding Castings if a downturn hits the industry, and who can reliably predict the next one of those?

At today’s share price of 436p, the shares change hands for a forward price-to-earnings (P/E) multiple of 10.5 for year to March 2017, and there’s a forward dividend yield of 3.4%, with analysts expecting earnings to cover that payout around 2.75 times. That looks attractive, but I’d expect a low valuation multiple like this at such a mature stage in the economic cycle as now. Through the lens of cyclicality, Castings might not be as cheap as it looks. I’d be happier with a yield in excess of 5% and a P/E rating in single digits.

What about a bigger firm?

Rio Tinto relies on producing iron ore for most of its profits. As such, the firm is further back in the production chain than a firm such as Castings, which turns iron into a product, thus adding value. Castings enjoys more control over the pricing of its product than Rio Tinto. In fact, Rio Tinto is at the mercy of market forces and the selling prices that such forces produce for iron ore. That means the effects of cyclicality can be more extreme and more immediate than for a manufacturing concern such as Castings. As such, the negatives around cyclicality faced by Castings are even more onerous for a miner such as Rio Tinto.

It’s different story for GlaxoSmithKline, though. The pharmaceutical industry is good at generating stable and consistent cash flow thanks to steady, repeat demand for drugs and medicines. I see GlaxoSmithKline’s recent share-price weakness as a sensible reversion to fair value, which makes the firm look attractive. After several years of patent-cliff induced earnings contraction, City analysts following the firm expect earnings to lift by 12% during 2016.

At today’s share price of 1366p, we can pick up a slug of Glaxo shares for a forward P/E multiple of 16. There’s also a forward dividend yield running at 6%, and analysts expect forward earnings to cover the payout just over once. There’s life in GlaxoSmithKline’s development pipeline that could drive further progress on earnings in the future.

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

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