There are two types of turnaround a firm can experience: in its earnings or the share price. But, while the two should in theory coincide, they rarely do. For brave investors, this means opportunities.
An example is Intel (INTC, $19.26), says Michael Sivy on CNNMoney.com. It is trading at near to three-year lows due to weaker than expected PC sales, inventory management problems, competition and squeezed margins. To combat these, CEO Paul Otellini has announced plans to “slash” costs, clear out old inventory and increase research and development. In addition, the firm’s latest chips “are expected to start helping sales before the end of the year”. Analysts, at least, appear convinced, forecasting a 27% gain in earnings in 2007 and 15% compound annual earnings growth over the next five year. But investors seem less sure, with Intel’s shares trading on a multiple of just 15.9 times forward earnings – virtually an ex-growth multiple. If the analysts’ earnings forecasts are right, today’s p/e multiple will “look like a bargain”.
George Putnam, in Forbes agrees that Intel is a turnaround stock and highlights eight other firms that are also “unloved and underleveraged”. These are Coke (KO, $43.21); Dell (DELL, $24.32); Johnson & Johnson (JNJ, $58.94); Microsoft (MSFT, $23.25); Tootsie Roll (TR, $29.51); Wind River Systems (WIND, $10.90); Yahoo (YHOO, $31.10); and Check Point Software (CHKP, $19.66).
Finally, says Johanna Bennett on Barrons.com, video rental firm Blockbuster (BBI, $5.01) may also fit the bill. The company’s shares have fallen almost 83% in the past four years and it is forecast to make a loss of two cents a share this year. But Blockbuster has started up an online rental service, which has over a million subscribers, and is projected to have two million by the end of the year. Now earnings are forecast to rise to 24c per share to December 2007, putting the company on a 20.9 times rating. And there is already evidence of a turnaround in the form of the company’s free cash flows, which on an annualised basis puts Blockbuster’s shares on a multiple of just 7.3 times free cash flow. With expectations so low, Bennett concludes, “it’s easy to see why taking a risk can reap big rewards”.