The outlook for the UK economy is clearly uncertain. Brexit talks may now be progressing reasonably well, but there is no guarantee that they will deliver a favourable agreement for the UK. So investor, consumer and business confidence may weaken in the coming months, and this may cause UK-focused stocks to come under a degree of pressure.
However, this could also be an opportunity to buy such companies when they offer a wide margin of safety. In fact, here are two stocks which seem to offer good value for money as well as the prospect of increasing earnings in the medium term.
Cinema operator Cineworld (LSE: CINE) released a trading update for the 2017 financial year on Wednesday. It showed that it continues to make encouraging progress, with its total revenue increasing by 7.9% on a constant currency basis. The UK & Ireland growth rate was 5.9%, while its international operations saw sales increase by 10.9%. The performance of its UK operations was highly encouraging and shows that consumer confidence may not be quite as low as recent data suggests.
The company also released confirmation of a rights issue as it seeks to acquire one of the largest cinema operators in the US, Regal. The rights issue is expected to raise £1.7bn on a four new shares for every one old share basis. The proceeds will be used to part-fund the £2.6bn acquisition, which would make the combined company one of the major players in the international cinema operator business.
This improved geographic diversity could reduce Cineworld’s overall risk should Brexit talks turn sour. The company is expected to report a rise in its bottom line of 9% this year, followed by further growth of 8% next year. With it trading on a price-to-earnings growth (PEG) ratio of 1.6, it seems to offer good value for money for the long run.
Also having significant exposure to the UK economy is Morrisons (LSE: MRW). The company has experienced a challenging period since the financial crisis, but now seems to have found the right strategy to deliver growth.
It is focusing on methods of increasing sales and profitability which do not require large upfront investment. For example, it has tapped into the growth in convenience store sales by reviving the Safeway brand and signing a deal for its products to be sold in a range of such stores. It has also leveraged its status as a major food supplier to work with Amazon on its online grocery offering.
These changes are expected to result in a rise in earnings of 8% this year and 9% next year. With Morrisons trading on a PEG ratio of 1.8, it seems to offer upside potential. While competition in the UK supermarket sector may be high, the stock could be a surprisingly strong performer. Therefore, while its shares may be volatile, they could rise significantly in the long run.
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Peter Stephens owns shares in Morrisons. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. 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.