While disappointing company updates can cause disruption for investors in the short run, they may also provide an opportunity to generate high returns in the long run. That’s especially the case where the reason for the company’s poor performance could prove to be a temporary setback which improves over the medium term. With that in mind, now could be the perfect time to buy a slice of Nichols (LSE: NICL), the producer of Vimto and other soft drinks.
The company’s trading update released on Tuesday showed that it is making good progress with its UK operations. Sales of its Vimto brand in the UK are 9% ahead of the prior year, which is ahead of the UK market growth rate for the soft drinks category of 2.3%. Similarly, growth in its operations in Africa has continued to be strong. Its full-year international revenues are expected to be at least 20% higher than the previous year, which is particularly impressive given that the prior year was a strong one for the business.
However, while sales are robust in many of its markets, the company’s operations in Yemen have struggled. Due to an escalation of hostilities in the country, the supply route to its Yemeni customer has been blockaded. Therefore, sales are set to suffer dramatically in the region, which means the company’s overall profit before tax is set to be in line with the prior year.
While flat profit growth is a disappointment for the company, it remains a strong proposition for the long term. Its overall performance remains upbeat and the blockade in Yemen may not last in the long run. Its ability to deliver double-digit earnings growth is exceptional, with it having done so in each of the last five years. Therefore, now could be the perfect time to buy it on a multi-year time horizon.
Similarly, there may also be an opportunity to buy fellow consumer goods company Burberry (LSE: BRBY). Its outlook is somewhat challenging at the present time. Its earnings are due to rise by just 5% in the current year, followed by 1% next year.
While such growth rates are unlikely to positively catalyse the company’s share price, they come at a time when the stock is making major changes to its business model. It will pivot towards luxury products, where pricing power may be greatest. This will entail one-off costs that could include store closures in a number of different locations over a sustained period. However, a smaller, more adaptable and profitable Burberry could be a stronger business in the long run.
With a price-to-earnings (P/E) ratio of 21.6, it is hardly cheap at the moment. However, with a strong management team and what appears to be a sound strategy, it could deliver impressive returns in the long run.
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Peter Stephens owns shares in Burberry. The Motley Fool UK has recommended Burberry and Nichols. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.