These two FTSE 100 stocks have both been through a rough time, with their share prices well down on five years ago.
Recent performance has also been poor but now could be an opportunity to jump in ahead of any recovery, rather than afterwards.
If you’ve been following the fortunes of troubled telecoms giant BT (LSE: BT), you may need stress counselling. If you hold its stock, you almost certainly will. It is down 60% in three years as hopes of a recovery have been repeatedly dashed.
Anybody who decided to catch this falling knife will be regretting their decision, as the share has plunged from a peak of almost 500p in November 2015 to around 160p today. My colleague Kevin Godbold reckons the BT share price could even fall as low as £1, as its net debt of £12bn is 3.65 times last year’s operating profit.
If he’s right, today’s rock bottom valuation of just 6.5 times forward earnings could lure bargain seekers into dangerous waters.
BT’s absolutely stonking forward yield of 9.4 times earnings is also alluring but chairman Jan de Plessis warns it may be reduced in the next year or two, to help fund ambitious plans to connect 15m homes to full fibre broadband.
Yet I’m going to stick my neck out and suggest that for brave – and crucially, far-sighted, investors – BT could be a risky buy. Even a dividend cut could leave a generous yield, and management is now focused on delivering a successful turnaround plan.
Be warned, there could be further pain before the gain, though.
Aerospace and defence business Rolls-Royce (LSE: RR) has also given investors an uncomfortable ride lately, its stock falling 25% in the past year. This is not a one-off, the jet engine maker has been struggling for some years, after issuing an astonishing five profit warnings over 2014 and 2015.
Investors buckled up for take-off when former ARM Holdings boss Warren East was appointed CEO in July 2015, but he is still grappling with what was always going to be a huge job. At the time of his appointment, the Rolls-Royce share price traded at around 846p, today it is even lower at 741p.
Rolls-Royce remains a business in transition, hit by costly technical problems with its Trent 1000 engines, while investors have long struggled to value what is a sprawling, complex business, whose currency hedging activities make it even harder to gauge underlying worth.
Investors are still banking on a recovery, with management apparently on the right track in redirecting the group’s focus to its core activities, and making a push into electrification and digitisation.
The yield is a disappointment at just 1.8%, well below the 4.3% average for the FTSE 100 as a whole. However, East is looking to bump up free cash flow over the next couple of years, which would help underpin payouts. My big concern is that the Rolls-Royce share price looks expensive, trading at almost 40 times forward earnings, although Roland Head says it looks better value judged by other measurements.
Earnings growth looks promising, with City analysts pencilling a 26% rise this year and a mighty 64% in 2020. There’s still some way to go, but the future could be brighter.
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Harvey Jones has no position in any of the shares mentioned. 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.