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These 2 recovery plays should have further to go

For evidence of how buying companies experiencing temporary difficulties can often pay off, look no further than global security provider G4S (LSE: GFS) and Bradford-based grocer Morrisons (LSE: MRW). After a reversal in fortunes for both, can this momentum be sustained?

Safe and sound?

Go back to last June and few investors had a good word for £4.6bn cap G4S. The shares had fallen to a low of 175p — a 43% reduction on the price achieved in April 2015.

Fast-forward almost 10 months and sentiment has returned in spades, with shares now boasting a price of 298p. Performance over the last few weeks has been particularly strong (up just over 10%) following the release of full-year results.

With revenue growth of 6.3% to £6.2bn and a 16.6% increase in earnings to £246m, it’s hard not to agree with CEO Ashley Almanza’s assertion that the company is making “good progress” with its transformation strategy. Growth in both developed and emerging markets appears steady (6.8% and 5.4% respectively) with the company securing new contract sales of £2.5bn in 2016. G4S’s balance sheet continues to improve with net debt-to-EBITDA now standing at 2.8 times, while operating cash flow came in at 638m last year — a 61.5% improvement.

Looking to the future, G4S’s pipeline of work looks healthy with an annual value of £6.8bn. This, combined with references in the final results to “stronger foundations,” plus “growing competitive capabilities” and “an attractive array of market opportunities,” would indicate that there may be further upside ahead for the shares.

Based on a price-to-earnings (P/E) ratio of 16 this year, reducing to below 15 in 2018, shares in G4S appear reasonably valued for now and are expected to yield 3.3% in 2017. 

Getting stronger

Under the leadership of David Potts, £5.5bn cap Morrisons appears to have well and truly turned the corner with its share price responding accordingly. Since reaching a low of 143p back in December 2015, the stock has climbed a very encouraging 65%.  

Earlier this month, the company revealed an encouraging set of full-year figures. With like-for-like sales rising 1.7% and a particularly strong performance in Q4. This represented the first year of positive growth for the company since 2011/12. Underlying profit before tax rose 11.6% to £337m with underlying earnings per share rising just under 40% to 10.86p.  

Positively, net debt levels fell to just under £1.2bn. This figure is now expected to be under £1bn by the end of the 2017/18 financial year. A 8.6% hike to the total dividend was further indication of a return to health.

There could be more to come. New “capital-light growth opportunities,” such as the lucrative partnership with online giant Amazon and a revival of the Safeway brand, should do the company’s prospects no harm at all. Further productivity and cost savings (building on the £1bn already achieved) are also planned.  

Of course, Morrisons still operates in a highly competitive environment. It could grow even more cut-throat in the months ahead if sterling continues to slide as a result of Article 50 being triggered (thus raising the prices of imported food). Factor-in the rise in depreciation and pension costs already identified by the company and 2017 will be anything but plain sailing.

That said, so long as prospective investors’ expectations of future share price growth remain realistic, I still believe Morrisons is worthy of consideration at the current time.

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Paul Summers 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.