Is It Finally Time To Buy Avon Rubber plc And Rolls-Royce Holding PLC?

Are these 2 stocks set to mount exceptional recoveries? Avon Rubber plc (LON: AVON) and Rolls-Royce Holding PLC (LON: RR).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in Avon Rubber (LSE: AVON) have slumped by over 14% today after it released a rather disappointing update. Dairy market conditions have remained soft in the first quarter of the financial year, with general market conditions for dairy farmers (particularly in Europe) being weak as a result of low milk prices.

This has reduced demand for Avon Rubber’s consumable products as farmers extend the life through over-using product. Due to the capital nature of Avon Rubber’s InterPuls product, it makes the replacement cycle longer. Therefore, the outlook for Avon Rubber’s dairy division is rather uncertain, although the company continues to see an encouraging take-up of the innovative Cluster Exchange service across North America and Europe.

Meanwhile, Avon Rubber’s protection and defence division continues to offer a number of higher margin export opportunities. Although the timing of order receipts remains unpredictable, the long-term outlook for the unit is encouraging – especially with the integration of the Argus business having progressed well.

With Avon Rubber forecast to post a fall in its bottom line of 2% in the current financial year, investor sentiment could remain rather subdued in the coming months. That’s especially the case since its outlook remains relatively uncertain – as evidenced by today’s update. With the company’s shares trading on a price-to-earnings (P/E) ratio of 15.6, they could come under further pressure, so now doesn’t appear to be the right time to buy a slice of the business.

Challenges ahead

Also offering an uncertain future is Rolls-Royce (LSE: RR). It’s in the midst of a major turnaround after releasing multiple profit warnings in recent years. Realistically, it would be unsurprising if Rolls-Royce’s guidance was downgraded since trading conditions in a number of its important markets remain challenging. And with its shares continuing to command a premium compared to a number of sector peers, there’s scope for a reduction in Rolls-Royce’s P/E ratio, which currently stands at 18.2.

Rolls-Royce has a long road ahead of it as it seeks to recover lost ground from recent years. Clearly, it has a highly capable management team and a robust order book. But with the company’s bottom line due to decline by 43% in the current year, the scale of the task ahead is becoming clear. Such weak performance from a business with such an excellent track record of growth is highly unusual and indicates that, at a time when the aerospace and defence industries are facing an uncertain future, there may be better opportunities elsewhere.

That’s not to say that Rolls-Royce won’t deliver a successful turnaround, but rather that its current valuation doesn’t accurately reflect the challenges it faces. Furthermore, with a dividend cut to come in 2016 and potentially more in future, investor sentiment in Rolls-Royce could worsen in the coming months and lead to more share price declines following the 40% slump of the last year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »