3 UK Stocks That Missed the Rally

05/24/2013 7:00 am EST


Are these three market laggards, which slipped while the FTSE-100 was rising to 6,700, now good value? GA Chester of The Motley Fool UK looks at the facts.

After rocketing 30% from its 52-week low, the FTSE-100 index has broken through the 6,700 mark, and reached the highest level seen since 2000. The UK's leading index is now within just 150 points of its all-time high of 6,930, reached at the height of the dot.com bubble.

Not all companies have joined in the great rally. As a contrarian investor, I'm always interested in stocks that are out of favor with the market. Unloved shares have the potential to be some of the best long-term investments.

Imperial Tobacco Group (London: IMT), security firm G4S (London: GFS), and temporary power supplier Aggreko (London: AGK) have all sunk while the market's soared.

Imperial Tobacco
At a current price of 2,361p, Imperial Tobacco is down 9% from its 52-week high.

The UK's second-largest tobacco group is now trading at a forecast price-to-earnings ratio of 11.3 for the year to September 2013, and offers a prospective dividend yield of 4.9%. Rival British American Tobacco (BAT) has a P/E of over 16, with a yield of 4%.

Analysts forecast Imperial Tobacco's earnings will grow at an average of around 5% a year for this year and next, but reckon British American Tobacco's growth will be nearer 10% a year.

Whatever BAT's prospects, Imperial's 4.9% yield in the hand and the potential for a re-rating of the shares further down the line make the stock an interesting long-term prospect for growth and income.

At a current price of 250p, G4S is down 20% from its 52-week high. A staffing fiasco at last year's Olympic Games hit the shares hard, and chief executive Nick Buckles has just stepped down after what has been a series of embarrassments over the last few years.

The world's largest security firm is now trading at a forecast P/E of 11.4 for the year to December 2013, with a prospective dividend yield of 3.8%. Analysts are forecasting earnings growth of 4% for the current year, but are expecting growth to accelerate to 10% by 2014.

Reputational damage to a company doesn't last forever. Given that demand for security services around the world isn't likely to vanish any time soon, and that G4S generates almost a third of its revenue from high-growth developing markets, the longer-term prospects of this lately beleaguered company look rather promising.

At a current price of 1,823p, Aggreko is down 24% from its 52-week high.

The global leader in the rental of temporary and emergency power-generation equipment issued two profit warnings in as many months at the end of 2012. The first warning was blamed on adverse currency movements and an increased provision for bad debts; the second on several factors, including the winding down of US military operations in Afghanistan.

Under the circumstances, you may be surprised to learn that Aggreko's shares are trading on a lofty forecast P/E of 19 for the year ending December 2013, particularly as earnings are forecast to fall 7%, with growth only resuming at 7% for 2014. During the period between 2008 and 2012, Aggreko's average annual earnings growth was 28%.

A P/E of 19 can certainly be justified when earnings growth is running at 28%, but does the company merit a premium rating when analysts are forecasting no earnings headway until at least 2015? On the positive side, the long-term structural drivers of growth for Aggreko's business certainly remain intact.

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