However, recovery shares can also offer high reward potential. Their valuations may factor in a worst-case scenario that provides a capital growth opportunity for long-term investors.

Having fallen significantly in the last year, do Santander (LSE: BNC) and Gama Aviation (LSE: GMAA) now offer favourable risk/reward ratios? I think they could.

Weak performance

Business aviation services company Gama Aviation released a profit warning on Monday, with its performance in the third quarter weaker than expected across its divisions. The company had previously guided towards substantial growth in the second half of the year. Now that it has better visibility for the coming months, though, it expects underlying operating profit to be around $3m lower than previous expectations.

As a result, its shares have declined by as much as 27% following the news. This means that in the last year they’re down by around 46%, which is clearly hugely disappointing for investors.

While lower-than-expected demand could continue over the near term, the operational performance of Gama Aviation seems to be sound. It’s expected to post earnings growth over the medium term, while a price-to-earnings (P/E) ratio of around 9 suggests that it may offer a wide margin of safety. As such, and while further volatility and share price declines cannot be ruled out, I believe the long-term investment potential of the business could be enticing for less risk-averse investors.

Global growth

Santander shares have also been falling in the last year. The global bank has become less popular among investors despite a relatively strong operational performance. Its shares are down 29% in the last 12 months, which indicates that investors are becoming increasingly concerned about some of its key markets.

Clearly, countries such as the UK and Brazil are experiencing significant political change at the present time. This could lead to uncertainty for the bank, while general fears about the prospects for the world economy could lead to a continued de-rating of its shares. For example, the prospects of a global trade war, and rising US interest rates, may peg back its financial performance to some degree.

However, with Santander having made improvements to its efficiency and business model, it seems to be in a strong position to generate future growth. It trades on a P/E ratio of around 9, while it has a dividend yield in excess of 5% from a payout which is covered 2.2 times by profit. And with the company’s bottom line due to rise over the next two years, its overall financial performance appears to be sound. As such, and while it may prove to be unpopular over the coming months, I think the stock could deliver a successful turnaround in the long run.

The post Think the Gama Aviation and Santander share prices are bargains after 25%+ falls? Read this now appeared first on The Motley Fool UK.

Despite this, the airline’s share price is still ahead of the FTSE 100 over the last year, during which it’s risen by 16%, compared to just 3% for the blue chip index.

Today, I want to explain why I’m comfortable with easyJet’s falling share price, even though it means my personal shareholding is currently underwater. I also want to consider a smaller aviation stock with ambitious growth plans and a big cash pile.

More people are going orange

easyJet’s strong growth has continued this year. Statistics for August show that passenger numbers have risen by 5.8% to 84.1m over the last 12 months. Adding new flights hasn’t left the airline with empty seats, either. Load factor — a measure of how full each plane is — has risen by 1.2% to 93.6% over the last year.

These numbers don’t include the airline’s loss-making Berlin Tegel operations, which it acquired following the collapse of budget flyer Air Berlin last year. Losses from Tegel for the year ending 30 September are now expected to be £125m, versus original guidance of £95m.

The airline has been restricted by an “inefficient inherited schedule” at Tegel this summer, and has focused on protecting its flight slots and building market share. Performance should improve in 2018/19, when the firm expects Tegel to break even.

Looks cheap to me

Despite short-term losses at Tegel, easyJet’s underlying financial performance has continued to improve. In July, management upgraded its guidance for full-year pre-tax profit to £550m-£590m, up from £530m-£580m in May.

Analysts’ forecasts put the stock on a forecast P/E of 11.7 with a prospective yield of 4.0% for 2017/18. Earnings are expected to rise by a further 17% in 2018/19, cutting the P/E to 10.

Although Brexit could disrupt airline operations next year, I suspect a solution will be found to prevent this. At current levels, I rate easyJet as a buy.

Poised for growth

If you’re looking for growth buys in the aviation sector, one company you might want to consider is small-cap Gama Aviation (LSE: GMAA).

This 35 year-old business provides a mix of charter, fleet management, and maintenance services for corporate and government customers. In February it raised £48m in a share placing. This money will be used to fund the acquisition of operations in Hong Kong and the development of new bases in the US and the Middle East.

The group wants to become the “leading global business aviation services group.” Half-year results published today suggests this could take a little time. Revenue rose by just 3% to $104.6m during the first half, while underlying pre-tax profit fell by 6% to $6.6m.

However, the company says full-year expectations are unchanged and that its move to a new European base at Bournemouth Airport is on schedule to complete this year, delivering “immediate efficiency savings.”

The placing has left the group debt free, except for lease liabilities, and with a net cash balance of $21m. Analysts’ consensus forecasts put the stock on a forecast P/E of 10 in 2018, falling to a P/E of 8 for 2019.

I’d want to do some more research before buying, but this looks like a potential growth opportunity to me.

The post How low can the easyJet share price go? appeared first on The Motley Fool UK.

Beating expectations

Shares of engineering and construction consultancy Driver Group (LSE: DRV) rose by as much as 15% this morning after the firm advised investors that profits should be “comfortably ahead” of expectations.

This £50m company has been in turnaround mode since 2015. But the business returned to profit last year and today’s news suggests further gains may be possible.

Driver’s financial year ends on 30 September, so today’s update covered the first four months of the year. According to the firm, trading so far this year has been “significantly ahead” of internal forecasts.

Management said that “current activity levels are also high and the Group has a healthy pipeline of potential assignments”. Combined, these factors indicate that “the outcome for the year as a whole is likely to be comfortably ahead” of expectations.

Too late to buy?

Driver’s share price has performed strongly over the last year, climbing by 50%. Are the shares still cheap enough to consider buying?

Prior to today, consensus forecasts suggested earnings per share of 4.1p this year. I think it’s reasonable to add at least 10% to these forecasts after today’s news, which would suggest earnings of 4.5p per share. At the last-seen share price of 73p, that puts the stock on a forecast P/E of 16.

This doesn’t seem especially cheap to me, and no dividend is expected. However, Driver has generated substantially higher profits than this in the past. If the global construction and engineering markets in which the company operates remain stable, then further growth might be possible.

A potential high-flyer

I believe that aviation services group Gama Aviation (LSE: GMAA) could offer investors the chance to profit from a period of major corporate change.

The group operates in Europe, the US and the Middle East, providing a mix of aircraft charter, management and maintenance services. Organic growth has been boosted by acquisitions and the group’s underlying operating profit rose by 30% to $7m during the first half of last year.

However, the firm’s management isn’t stopping there. Earlier this month, Gama announced plans for a £48m share placing to fund a potentially transformative series of deals. The placing — equivalent to about 40% of the current £112m market cap — will see Hong Kong-based investment group Hutchison become a 21% shareholder.

Using the cash, Gama will purchase Hutchison’s Hong Kong aviation interests for $19.8m. It will also invest $20m in new facilities in the US and at Sharjah in the Middle East, as well as targeting further acquisitions.

It’s a complex picture with a lot of moving parts, so the financial outcome isn’t easy to predict. But the company’s guidance is that this deal will dilute earnings in 2018, be neutral in 2019 and boost earnings from 2020 onwards.

Is Gama a buy?

I’d want to do some further research before investing in a situation like this, but I’m cautiously optimistic about this deal. Gama has generated a high return on capital employed in recent years, which is usually a good indicator that management is investing wisely.

With the stock trading on a forecast P/E of about 10, pre-placing, I believe this could be a potential growth buy.

The post 2 small-cap growth stocks I’d consider buying with £1,000 today appeared first on The Motley Fool UK.

But the Marmite maker and Persil producer isn’t the only stock that could deliver stonking returns long into the future. Indeed, Gama Aviation (LSE: GMAA) is another share I reckon you might be able to retire on.

Plane brilliance

The business aviation service provider has been a stellar performer in the year to date, its share price gaining 82% since the beginning of 2017 and soaring to 16-month highs above 250p just today, following the release of half-year numbers.

The Farnborough-based company advised that revenues detonated 45% between January and June, to $291m, a result that powered underlying pre-tax profit 40% higher to $7m.

Chief executive Marwan Khalek said: “The first half of 2017 has seen the group maintain the positive momentum generated through last year to deliver a good performance in line with our expectations… in all divisions and all regions we achieved strong revenue growth and encouraging improved margin performance.”

The company saw US Air revenue rise 74% in the six-month period, and it advised that “the integration of the BBA aircraft management business into the US Air division is progressing well and benefitting from a buoyant US market.”

Gama merged its aircraft management and charter business in the US with that of BBA Aviation back in January to create the country’s biggest aircraft management firm, a move that created significant cost benefits and expanded its global footprint.

And at US Ground, Gama saw revenues shoot 19% higher in January-June thanks to the impact of new base openings last year and fresh contract wins.

A strong North American marketplace was not the only cause to celebrate, however, with Gama noting that at Europe Air, “operational efficiency initiatives completed in 2016 have produced strong improvements in gross profit and EBITDA margins.” The flying ace also reported “modest revenue growth and improved profitability” at its Europe Ground.

And elsewhere, Gama advised that Middle East Air and Ground had showed “encouraging growth” in the first half.

Those seeking an immediate earnings explosion may well be disappointed — Gama is predicted to endure a 31% earnings drop in 2017. However, I remain convinced that next year’s predicted 9% bottom-line rebound should start a run of chunky profits advances.

Despite hitting fresh share price summits on Wednesday, Gama boasts a forward P/E ratio of 10.2 times. And I reckon this is unmissable value given the company’s improving position in a growing market, helped by the impact of recent M&A activity.

Global goliath

As I previously said, I am also confident that Unilever should deliver terrific earnings growth, and my view is shared by the number crunchers — bottom-line rises of 18% and 10% are chalked in for 2017 and 2018 respectively.

Few companies can boast the formidable brand power and broad geographic footprint of Unilever. And these should continue unlocking exceptional shareholder returns, in my opinion. I reckon the FTSE 100 giant is well worth its premium forward P/E ratio of 22.6 times.

The post Unilever plc isn’t the only growth giant that could fund your retirement appeared first on The Motley Fool UK.

The UK pet business is big business, and it’s improbable that the industry will go through any recession, even during periods of economic hardship cats and dogs still need to be fed and groomed. Against this backdrop, Pets at Home (LSE: PETS) seems like a great investment. 

Unfortunately, over the past year its shares have dived as the company has struggled to meet lofty City expectations for growth. After four years during which pre-tax profit rose from £22.5m to £95.4m, for the fiscal year ending 31 March 2018, analysts expect profit to fall by around £10m to £85.6m and earnings per share to decline by 10%. 

Despite its large target market, Pets at Home is facing increasing competition, but as the UK’s largest pet-focused business, it is uniquely positioned to grab back market share. Management has unveiled several initiatives to bring customers into the company’s stores, including changes to branded food lines and price cuts on various items. The group is also becoming a one-stop shop for pet owners by placing vet practices and grooming salons in its stores.

Nonetheless, despite these actions to try and turn around business performance, the shares have continued to trend lower. Luckily, after these declines, the business is trading at a desirable 11.9 times forward earnings, 25% below the average multiple of 15.9 times earnings awarded to the company since its IPO. As well as the discounted valuation, the shares also support a dividend yield of 4.6%.

40% discount 

As well as Pets at Home, Gama Aviation (LSE: GMAA) also looks to me to be an undervalued stock. After several years of lacklustre performance, Gama’s fortunes picked up last year as the company’s growth effort started to pay off. 

Pre-tax profit hits £19.3m for 2016, up 180% year-on-year and significantly above the pre-tax profit of £520,000 reported for 2012. Between 2012 and 2016, revenue expanded from £17m to £203m. Analysts expect Gama’s new-found profitability to continue for the next few years with earnings per share of 25.9p pencilled-in for 2017 and 28.6p for 2018. Based on these figures, the shares currently trade at a forward P/E of 9.3, falling to 8.4 for 2018. 

Compared to sector peers such as Air Partner, these multiples appeared to undervalue the business severely. Indeed, shares in Air Partner currently trade at a forward P/E of 15.1, and while Air Partner’s growth is faster, there’s no clear reason why Gama should trade at a near-40% discount to its peer. 

A revaluation to a more appropriate multiple of around 12 times forward earnings would send shares in Gama up to 311p, 27% above current levels. It may take time for the market to realise the potential here, but luckily investors will be paid to wait. Shares in Gama currently support a dividend yield of 1.1% and the payout is covered 10 times by earnings per share, leaving plenty of room for payout growth. 

The post These value stocks could be trading at deep discounts appeared first on The Motley Fool UK.

In this article I’ll look at two very different companies which I believe have the potential to deliver market-beating returns.

A FTSE 100 bargain?

British Airways owner International Consolidated Airlines Group (LSE: IAG) reported a 28.8% rise in profit after tax last year. The group’s diluted earnings rose by 25.7% to €0.88 per share, putting the stock on a trailing P/E of just 7.1.

Much of this growth was the result of IAG’s continued expansion. Available seat kilometres (a measure of capacity) rose by 9.4% to 298,431m in 2016. Reassuringly, the group’s load factor — the proportion of seats sold — remained stable, rising by 0.2% to 81.6%.

One potential problem was that pressure on ticket prices and adverse currency movements caused reported passenger revenue to fall by 2%. This was offset to some extent by lower costs, but price competition from budget airlines remains a concern.

However, IAG’s finances remain in good shape, despite pressure on ticket prices. The group’s operating margin rose from 10.1% to 11% last year, while its adjusted net debt, which includes lease costs, edged lower, falling by 4.1% to €8,159m.

Broker consensus forecasts suggest that IAG’s profits will remain flat this year, at €0.88 per share. A dividend of €0.24 per share is expected. These forecasts put IAG stock on a forecast P/E of 7.1 with a prospective yield of 3.9%.

In my view, a fair amount of bad news is already priced into the stock. If trading remains robust, I think the shares could perform well from here.

A small-cap with big potential?

Gama Aviation (LSE: GMAA) specialises in providing private jet services for corporate and government customers. Previously known as Hangar 8, Gama has grown rapidly over the last five years through a mix of acquisitions and organic growth.

The group’s sales have risen from $26.9m in 2012 to $203m in 2016. Post-tax profit has risen from $0.49m in 2012 to $16.6m last year. With such rapid growth, you might expect Gama stock to be on a sky-high P/E rating already.

That’s not the case. Gama trades on a 2017 forecast P/E of just 8.3.

One reason for this is that the group’s expansion has partly been funded by issuing a significant number of new shares. Since April 2014, Gama’s share count has risen from 9.5m to 43.9m. This means that earnings per share have not risen as fast as the group’s headline profits.

I’d normally be wary about investing in companies where shareholder dilution is a serious risk. But Gama’s return on capital employed has averaged 16.9% over the last four years, suggesting to me that the group’s acquisitions are making a fair contribution to profits.

Gama’s adjusted earnings are expected to rise by 6% to $0.32 per share in 2017 and by 11% to $0.36 per share in 2018. These forecasts put the shares on a forecast P/E of 8.3, falling to a P/E of 7.5 next year.

I’d want to do further research, but Gama looks like a potential growth buy to me.

The post 2 ‘hot’ growth stocks you can’t afford to ignore appeared first on The Motley Fool UK.