When looking at stocks you must know how a company plans to grow and what earnings opportunities it may have. These factors are essential to the kind of returns you will get over the long-term.
AP Eagers (ASX: APE) released an announcement in late December about increasing its shareholding in competitor Automotive Holdings Group (ASX: AHE) from 18.57% to 19.57%.
That's just under the 19.9% threshold that would require a takeover offer. The company could sit at this level and collect dividend income and capital gains from future share price movements. However, at its recent half-year results presentation it showed a graphic of its Australian revenue per state, and conspicuously Western Australia had 0%.
Automotive Holdings Group is based in WA, but has dealerships in QLD, NSW and VIC. So a merger of the two companies would give AP Eagers a new regional presence in WA and also reduce competition in existing state markets. In 2013 AP Eagers raised its NPAT from $40.6 million to $55.5 million, continuing its earnings growth history well above its past five-year compound annual rate of 14.1%.
Orica (ASX: ORI) is an explosives, mining chemicals and fertiliser producer. It's moving forward with expansion plans for its Kooragang Island ammonium nitrate facilities in NSW. This is to meet projected demand increases for mining explosives, with current capacity soon expected to be exceeded by demand. Similarly, its Burrup Joint Venture ammonium nitrate facility in WA is currently under development. Both the NSW and WA plant expansions are due for completion in 2015.
Extra capacity will potentially raise revenue and earnings, so investors familiar with the company and industry should look into this more closely to see earnings projections two or three years out to better judge possible share price growth.
It currently has a PE of 14.2. This is not at a historical high for the company, so it appears the effect of the mining downturn is still impacting the market's perception of the company. Revenue and EBITDA are both up compared to 2012, so it could benefit from further price improvements in iron ore and coal even before the new capacity comes online.
Foolish takeaway
When there is not a lot of news about companies it is very important to take that extra time and effort to find out what a company is doing. Company websites will have some news, media releases as well as regular ASX announcements. Investors should even call a company to ask about announcements and get a personal feel for how a business works. It is also essential to read annual reports and attend investor meetings.
