In the business world, change is inevitable. Eventually, a strategy which may have worked well for a number of years will need refreshing and such a time can be a sound moment to purchase shares in a company. That’s because strategic changes can act as a positive catalyst and push a company’s valuation higher.
One company which is making major changes to its business model is Centrica (LSE: CNA). Clearly, the last few years have been hugely disappointing and this has been reflected in Centrica’s share price, with it slumping by a third in the last three years. A key reason for this, of course, is the fall in the price of oil which has directly impacted Centrica’s oil and gas production division. Therefore, it has decided to sell off most of its exploration and production assets in that space as it seeks to become a more focused domestic energy supplier.
In addition to this major change, Centrica is aiming to cut its annual costs by £750m over the next five years, grow operating cash flow by 3-5% per year and also deliver a progressive dividend policy. As such, investor sentiment could be positively catalysed – especially if Centrica can offer more stable and resilient performance in future. Therefore, with its shares trading on a price to earnings (P/E) ratio of 12.1, it appears to be a sound long term buy.
Also changing its strategy is Tullow Oil (LSE: TLW). It has reduced the focus on exploration and is instead seeking to maximise production from its asset base. This is likely to have a very positive impact on its profitability, with the company’s major TEN development in Ghana now being 75% complete and on schedule to deliver first oil in 2016.
This shift in strategy is likely to have a positive impact on investor sentiment, since Tullow Oil has suffered greatly in recent years as a result of a falling oil price hurting its profitability. However, with the company’s net profit forecast to rise by 540% next year and its shares trading on a price to earnings growth (PEG) ratio of only 0.1, now appears to be a sound moment to buy for the long term.
Meanwhile, speciality chemicals company Croda (LSE: CRDA) has today announced the acquisition of Incotec for £109m. Incotec is a leader in innovative seed enhancement and will complement Croda’s crop care business, with it set to retain its own identity moving forward as Croda seeks to tap into rising demand for better yields in the global crop market.
Although the deal appears to be a logical one, Croda’s share price is only marginally higher today. A reason for this may be that the company’s near-term prospects are already priced in. For example, Croda trades on a P/E ratio of 21.7 even though its bottom line is due to rise by 7% this year and by a further 5% next year. Both of these numbers are roughly in-line with the wider index’s growth rate and, having doubled in the last five years, Croda’s shares may not be the best place in which to invest at the present time.
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Peter Stephens owns shares of Centrica. The Motley Fool UK has recommended Centrica and Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.