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Think the Petrofac and Photo-Me share prices are expensive after 10%+ gains? Read this now

Buying shares in companies which have recorded recent gains can sometimes prove to be a poor decision. The margin of safety on offer may be relatively narrow following such gains, and this may lead to a disappointing investment performance.

In other cases, however, there may still be scope for capital growth. Two examples are Petrofac (LSE: PFC) and Photo-Me (LSE: PHTM), which both seem to offer low valuations and the potential for improving financial performance over the long run.

Growth potential

Instant-service equipment company Photo-Me’s share price increased by as much as 13% on Wednesday following the release of a trading update. The company is performing in line with expectations, and has been able to make progress in turning around its poor performance in Japan. It’s restructured its Japanese subsidiary, with a management reorganisation completed, administrative functions streamlined, and low-revenue machines relocated. This is set to lead to a return to growth for the division next year.

The performance of the remainder of the business has been positive. It’s invested in upgraded technology in its photobooths, while continuing to expand its laundry business. The kiosk market has also been stable, and there seems to be expansion potential through an increasing focus on innovation.

Looking ahead, Photo-Me is forecast to post a rise in earnings of 11% next year. It trades on a price-to-earnings growth (PEG) ratio of 1.2, which suggests it may offer a wide margin of safety. Following improvements to its customer offering, its long-term future could improve and lead to a stronger business in future years.

Improving outlook

The Petrofac share price has risen by a third in the last year, with an improving outlook for the energy sector a key catalyst. The oil price has risen significantly, and this is likely to increase activity across the energy sector. With oil producers being much more profitable now that oil is at a higher price level, investment and demand for support services companies could increase. This could create more favourable operating conditions for Petrofac.

Clearly, it will take time for the company to deliver an improving financial performance. In the current year and next year, its bottom line is forecast to fall by over 20% in total. The stock market, though, seems to be pricing in the disappointing financial outlook for the business over the next couple of years. The company’s shares trade on a forward price-to-earnings (P/E) ratio of around 10, which indicates that there’s a margin of safety on offer.

Furthermore, Petrofac has a dividend yield of 4.8%, covered 2.4 times by profit. Should the resurgence of the wider energy sector continue, it wouldn’t be a major surprise for the company’s dividends to increase, which could provide a boost to its total return over the long run and increase its investment appeal.

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Peter Stephens owns shares of Petrofac. The Motley Fool UK has no position in any of the shares mentioned. 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.