Shares in waste disposal company Shanks (LSE: SKS) have fallen by 4% today after it released a profit warning. Its update stated that market conditions in the oil, gas and electricity sectors have been challenging and this means that it now expects to miss forecasts for the full year. It also separately announced the sale of a non-core asset for £30m.
Despite the difficult trading conditions, Shanks’ commercial division has continued to deliver strong profit growth, driven by the company’s self-help initiatives. And its hazardous waste division has also traded robustly despite the deterioration in the oil and gas sector, which makes up around half of its sales. But with Shanks’ municipal division delivering worse performance than expected, its near-term outlook remains very challenging.
Looking ahead, Shanks was expected to post a fall in earnings of 5% prior to today’s update. As such, investor sentiment could worsen in the near term as the market begins to price-in an additional deterioration in its profit outlook. And even though Shanks is expected to rebound with double-digit earnings growth next year, its price-to-earnings (P/E) ratio of 17.7 indicates that its risk/reward ratio is relatively unfavourable at the present time.
Also recording a falling share price today is Sports Direct (LSE: SPD), with its shares having declined by almost 30% since the turn of the year due in part to its own profit warning. This was at least partly because of challenging performance in its European division and while disappointing, international expansion could still offer improved growth prospects for the company in the long run.
Clearly, Sports Direct is often in the news regarding its staffing policies, but it remains one of the most successful British retailers of recent years. Its business model was able to adapt to the cost of living crisis during the Credit Crunch and now needs to adapt to a UK consumer who has higher disposable income in real terms.
This could be a challenge and the company’s share price may come under pressure in the short run as its dirt cheap pricing could hold less appeal with wage growth being higher than inflation. But Sports Direct’s price-to-earnings growth (PEG) ratio of 1 indicates that it could become a top notch turnaround stock.
Better times ahead?
Similarly, AstraZeneca (LSE: AZN) is also enduring a very challenging period at the present time, with the pharmaceutical company being forced to come to terms with a patent cliff that has caused a severe decline in its earnings in recent years. Looking ahead, this is set to continue, with AstraZeneca expected to report a fall in its bottom line of 6% in the current year.
However, while this is disappointing, the market appears to be looking further out to AstraZeneca’s expected turnaround. With its pipeline gaining momentum through multiple acquisitions and drug development/approval news being relatively encouraging (as recent news has shown), investor sentiment could improve and push the company’s share price higher after its decline of 4% in the last year. And with AstraZeneca trading on a P/E ratio of 15.9, it continues to offer excellent turnaround potential.
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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca and Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.