Gains of 50% within two years may sound somewhat optimistic for any company. After all, share prices are generally high at the present time and while further gains may be on the horizon for the FTSE 100, such a rapid rise in a short space of time may be unlikely. However, reporting today is a company which trades on an extremely low valuation. It is in the process of a major turnaround which could see its share price soar over the next couple of years.
Encouraging progress
The company in question is Hargreaves Services (LSE: HSP). The diversified property, energy and infrastructure specialist has released encouraging half-year results. They show progress being made towards its three strategic goals.
For example, earnings within the continuing Distribution & Services operations business are set to be within the target range previously set. Furthermore, the company is making progress in creating and delivering the targeted £35m-£50m uplift in value from the Property & Energy portfolio. And with cash realisation from legacy assets also continuing, it appears as though the business is in the process of recording improved financial performance.
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Growth potential
Of course, Hargreaves Services remains a relatively risky stock to own. Its profitability has slumped to near-zero in the period, which shows just how large its turnaround project will be. Making it more difficult is the diversified nature of the business. This means there are many risks facing the business, while restructuring and reorganising is likely to take longer and be more complicated than for a pureplay operation.
However, Hargreaves Services is expected to deliver a stunning turnaround. In the current year, its earnings are forecast to double and then rise by a further 43% next year. Despite this rapid rate of growth, its shares trade on a price-to-book (P/B) ratio of just 0.67. This indicates they could rise by 50% and still only trade at NAV, which would be a realistic valuation given the company’s uncertain outlook.
Sector peer
Of course, Hargreaves Services is not the only company in its sector to experience difficult trading conditions. Builders merchant Travis Perkins (LSE: TPK) is expected to report a 1% fall in earnings in 2017, as uncertainty surrounding the outlook for the UK economy starts to impact on its performance.
While this may be the case in 2017, the company’s bottom line is forecast to return to growth of 9% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 1.3, which indicates that it offers a relatively wide margin of safety.
Clearly, Brexit talks could prove to be negative for the economy and cause investor sentiment to come under pressure. In such a situation, Hargreaves Services and Travis Perkins could see their share prices fall. However, the extent of this may be limited due to their low valuations. For long-term investors, now could be the right time to buy both stocks, with Hargreaves Services seeming to have the more enticing risk/reward ratio.
