The Motley Fool

Will AstraZeneca plc, Serco Group plc And RSA insurance Group plc Ever Deliver On Their Turnaround Potential?

Shares in insurance company RSA (LSE: RSA) were given a boost today after it beat market expectations to post a rise in operating profit of 43%. As a result of this, its shares are up by over 7%, with the company stating that the turnaround phase of its Action Plan is now largely complete.

With RSA’s underwriting profit rising by 437%, 2015 represented a record year for the business despite the major impact of floods in the UK. And with there being the prospect for substantial further improvement in underwriting profits moving forward, it would be of little surprise for RSA’s dividend to continue to rise at a brisk pace following today’s announcement that the final dividend has increased by 250% to 7p per share. This puts RSA on a yield of 2.4%, and with dividends forecast to rise during the next two financial years, RSA has a forward yield of 4.7%.

Clearly, RSA’s financial performance is on the up and this represents a superb turnaround from the difficulties it has experienced in recent years. While it’s often said that some turnarounds never turn, RSA is proof that with a sound strategy it’s possible to deliver improved financial performance. With its shares trading on a price to earnings growth (PEG) ratio of just 1.4, it seems to be a strong buy at the present time.

Incomplete turnaround

Also reporting today was support services company Serco (LSE: SRP). Like RSA, it has endured a challenging period, but today’s results show that it’s delivering improved performance. As well as underlying trading profit being ahead of market expectations (£96m versus guidance of £90m), Serco’s pipeline of new bid opportunities has increased by £1.5bn to £6.5bn. This bodes well for its future sales growth and alongside cost reductions of £330m, could have a positive impact on profitability in the medium-to-long term.

Despite this, Serco is still forecasting falling sales and profit in 2016 due to disposals and also contract attrition. Therefore, its turnaround process remains incomplete and with it trading on a price-to-earnings (P/E) ratio of 68.7, it may be prudent to await further positive news flow before buying a slice of it.

Drug pipeline

Meanwhile, AstraZeneca (LSE: AZN) is also in the midst of its own turnaround process. This is centred on improving its drug pipeline through the purchase of a number of smaller companies and treatments as it seeks to arrest the decline in profitability that has seen its earnings fall by over 40% in the last four years.

Clearly, AstraZeneca is still some way off delivering positive bottom line growth. Its forecasts for 2016 and 2017 aren’t particularly encouraging, with a decline in net profit of 10% expected this year and a marginal increase in earnings due for next year.

However, for long-term investors it remains a very strong buy since it has the financial firepower to change its business through vast M&A activity so as to deliver multiple blockbuster drugs in the coming years. And with it trading on a P/E ratio of just 15.1, it appears to offer good value for money based on its long-term potential.

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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.