With the Australian economy enduring a hugely difficult period and set to continue to do so, the future is highly uncertain for a number of apparently cyclical stocks. For many investors, this would include the likes of Commonwealth Bank of Australia (ASX: CBA) and Aurizon Holdings Ltd (ASX: AZJ) – both of which have posted share price falls in the last three months.
However, the two stocks may be able to perform significantly better than the market currently anticipates. In the case of CBA, its recent capital raising of $5bn has shored up its financial position and it now appears to be in a relatively strong position through which to survive the potential recession. In fact, CBA now has liquidity coverage which is around $22bn higher than regulatory requirements, which shows that it could emerge from a downturn in a stronger position relative to its peers.
Furthermore, CBA has also become a highly efficient bank, with its cost:income ratio now standing at just 42.8%. This indicates that it has a sound strategy which is keeping costs low and is a major factor in why it has been able to increase its bottom line at an annualised rate of 7.7% during the last five years.
Similarly, rail freight operator Aurizon is viewed as being highly dependent upon the level of economic activity, with it benefitting from a booming mining sector which caused demand for its services to rise in recent years. This contributed to an annualised increase in the company's bottom line of 28.5% during the last five years.
Looking ahead, Aurizon is changing its business model and has shifted its focus away from its rail haulage business which is dependent upon the level of activity in the mining sector, and towards its regulated track infrastructure. This is a much more defensive and stable earnings stream and, as such, the company's sales and margins could hold up better than may be anticipated by the market.
As a result of their sound strategies, CBA and Aurizon are forecast to increase their bottom lines at an annualised rate of 5.7% and 7.4% respectively during the next two years. And, with CBA trading on a price to earnings (P/E) ratio of 14.3 versus 15.9 for the ASX, there is upward rerating potential. Meanwhile, Aurizon's price to book value (P/B) ratio of 1.7 is in-line with the wider transportation index and this indicates that its shares are fairly priced.
The two companies also offer excellent income prospects which, given the likely fall in interest rates, could be highly valuable to investors moving forward. CBA currently yields 5.5% and is expected to increase dividends per share by over twice the rate of inflation during the next two years, while Aurizon has a yield of 5% and is due to increase shareholder payouts by 8.9% per annum during the same timeframe.
So, while an economic downturn is not ideal for either company, they seem to have the right strategies to emerge in relatively strong positions, while their valuations and income prospects indicate that now is a sound moment to purchase them for the long term.
