Imperial Brands

Despite the downturn in the stock markets, shares in Imperial Brands (LSE: IMB) gained 14% over the past 52 weeks. Its share performance has not only outperformed the large-cap FTSE 100 Index, but also its larger rival, British American Tobacco, which increased in value by just 5% over the same period.

The outperformance of Imperial Brands is due to its stronger recent earnings growth momentum and a better near term outlook. Adjusted EPS for Imperial rose 4.5% in 2015, compared to just 0.1% for British American, as Imperial suffered less from adverse currency movements and benefited more from cost savings.

This boosted margins and cash conversion, which also allowed Imperial to increase its dividends more substantially. Imperial lifted its dividends by 10.1% in 2015, to 141p per share, significantly beating the 4.0% growth from British American.

Looking forward, city analysts expect more of the same. Adjusted EPS is forecast to grow by 12% this year, with dividends set to increase by 10%. This would mean its shares trade at a forward P/E of 15.5, which is only modestly higher than its 3-year historical average of 14.1. But, with further benefits from cost savings likely to boost earnings growth over the next few years, I expect there will be further upside with Imperial Brands.

Taylor Wimpey & Persimmon

Another sector which is putting up a strong performance is housebuilding. Shares in the sector are in this position because the sector has been reporting record profits year after year.

The UK housebuilding sector bottomed-out in 2009, with the number of new home construction starts rising steadily ever since then. The upward trend in new home developments has bolstered the sector’s revenues, while margins have been expanding as property prices have recovered too. As you might expect, the combination of top-line growth and margin expansion is leading to some very impressive earnings growth rates.

Taylor Wimpey (LSE: TW) is particularly attractive as the company has no net debt (instead net cash of £223m at the end of 2015) and some of the widest profit margins in the sector – at 20.3%. Net profits for Taylor Wimpey soared 34.1% in 2015, even as new home completions rose by just 7.5%. This is because of a 2.4 percentage point expansion in margins and a focus on higher value properties.

Forward P/E valuations for Taylor Wimpey are slightly cheaper than its similar sized rivals, with shares trading at 10.2 and 9.5 times expected earnings in 2016 and 2017. With such low valuation multiples and robust growth, the company seems to be very undervalued.

Persimmon (LSE: PSN) is in even better shape, with net cash of £570m and underlying operating margins at 23.0% at the end of 2015. With such a huge net cash position, it has returned 110p per share to shareholders on 1 April 2016, worth around 5.2% of its share price prior to shares going ex-dividend on Thursday.

However, looking forward, growth for Persimmon is expected to lag behind Taylor Wimpey. Adjusted EPS growth in 2016 is expected to come at around 7% – compared to 16% for Taylor Wimpey. Valuations are slightly more pricey too, with shares valued at 11.1 and 10.5 times expected earnings in 2016 and 2017. Nevertheless, if property prices continue to trend upwards, almost all shares in the housebuilding sector will do the same.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.