The Motley Fool

Should you buy or sell Rolls-Royce Holding plc, Northgate plc & Mears Group plc after today’s news?

A big improvement

Rolls-Royce Holdings (LSE: RR) shareholders must be starting to sleep easy again. The group’s latest trading update confirmed that trading is in line with previous guidance, and reassured investors that the referendum outcome will have “no immediate impact” on the business.

The group’s underlying profit for the first half of the year is expected to be “close to breakeven”. During the second half of this year, stronger engine deliveries and aftermarket revenues are expected to help generate a full-year after-tax profit of £471m. That’s a big improvement on last year’s figure of £84m.

Rolls confirmed that it’s on track to deliver planned cost savings of £30-50m this year. As a major exporter, it may also benefit from the weaker pound. In my view, chief executive Warren East already seems to be creating the same stable and improving performance he achieved when in charge of ARM Holdings.

Although Rolls-Royce shares trade on a 2016 forecast P/E of 27 and do not appear cheap, earnings are expected to rise by a further 35% in 2017. A strong balance sheet and a 2.1% forecast dividend could mean that, for long-term investors, now may be a reasonable time to buy.

Good value but uncertain outlook

Full-year results from corporate van hire specialist Northgate (LSE: NTG) were always going to make interesting reading. I was looking for two things: confirmation that trading in Spain was improving as expected, and some indication of the outlook for the UK business.

Underlying operating profit rose by 24% to £41.3m in Spain last year. The average number of vehicles on hire was flat and utilisation remained satisfactory at 91%. In the UK, underlying operating profit fell by 15% last year to £58.2m. The average number of vehicles on hire was down by 3%, while utilisation fell from 88% to 87%.

The risks to Northgate’s Spanish business seem minimal to me when — or perhaps even if  —  the UK leaves the EU. I’m more concerned by the outlook for the UK. Northgate said this morning that the performance of the UK business in 2016 will be weighted to the second half of the year. That sort of statement is sometimes a coded profit warning.

Northgate shares are up by 5% this morning, but still look cheap given 6.7 times forecast earnings and a forecast yield of 4.9%. At this level, I believe they may be cheap enough to buy, despite the risk of a UK slowdown.

A profitable play on the housing shortage?

Investors are nervous about the housing market, but one segment that seems likely to continue to prosper is the rental market. Mears Group (LSE: MER) makes the majority of its profits from providing residential maintenance services for councils and housing associations.

In a statement today, Mears said that results for the first half of the year are expected to be in line with expectations. So far, 97% of this year’s forecast revenue of £973m has been secured. For 2017, the group has visibility of 85% of forecast revenue of £1,030m.

Mears reported a number of new housing contracts this morning and said that its pipeline of new opportunities remains strong. With the shares trading on a 2016 forecast P/E of 10 and offering a forecast dividend yield of 3.4%, this company might be worth a closer look.

Today's best opportunity?

Northgate and Mears look much cheaper than Rolls Royce. But which is the best buy?

To help you identify the best buy in today's volatile markets, our expert analysts have produced A Top Income Share From The Motley Fool.

The company includes features one of the three stocks I've written about in this article. The Fool's experts believe that shares of the company in question could be significantly undervalued.

If you'd like to know which stock is the Fool's top income buy, then download this free, no-obligation report immediately.

To get your copy, just click here now.

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