For many investors, forecasts are everything. If they are impressive and well ahead of those of the wider index, then they can lead to sky-high valuations and price to earnings (P/E) ratios that are many multiples of that of the wider market. However, if forecasts disappoint, then it can lead to a decline in investor sentiment and a fall in a company's share price.
Of course, for long-term investors, the focus is on buying high-quality businesses. Certainly, forecasts do matter, but the impact of external factors over which a company has little (or any) control on its short-term financial performance is unlikely to deter Foolish investors. In fact, it could be viewed as an opportunity to buy-in at a lower price, with the best times to buy a stock often being the same as when most investors are turned off by poor short-term prospects.
That appears to be the current situation regarding Woodside Petroleum Limited (ASX: WPL) and Crown Resorts Ltd (ASX: CWN). They are both suffering from the impact of external factors which means that their bottom lines are forecast to fall considerably over the next two years. In Woodside's case, its earnings are due to decline at an annualised rate of 25.2% during the next two years, while Crown Resorts' earnings are set to fall by 12.3% per annum during the same time period.
The reasons for such major falls are clear. In Woodside's case a lower oil price has meant that its sales and margins have been squeezed, while for Crown Resorts a slowdown in a key region for the business, Macau, has caused profit to be weaker than anticipated.
However, neither of these challenges are likely to last in the long run and, in Woodside's case, it is taking advantage of a lower oil price by acquiring other businesses at knock-down prices. This may not make a major difference to its bottom line in the short run but, for long term investors, it could have a hugely positive impact. Meanwhile, Crown Resorts could post better performance than is currently expected due to a lower interest rate (and weaker Aussie dollar) boosting its foreign earnings and also encouraging higher spending within the domestic market.
Of course, neither Woodside nor Crown Resorts is especially cheap based on their forward P/E ratios. For example, using financial year 2016 forecasts, Woodside trades on a forward P/E ratio of 17.4, while Crown Resorts has a forward P/E ratio of 19.8; both of which are higher than the ASX's P/E ratio of 16.
However, in the medium to long term, both companies are likely to emerge from their current challenges to post improved financial numbers, with Woodside likely to benefit from either a higher oil price, or a stronger position relative to its peers (owing at least partly to acquisitions such as the assets of Apache).
Meanwhile, Crown Resorts should benefit from an improving outlook for the Asian and global economy as well as a number of high-profile developments (such as The Crown at Barangaroo in Sydney) that could have a positive impact on its earnings. As such, and despite being relatively unpopular at the present time, they appear to be well-worth buying right now.
