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High growth. Even higher margins. Loads of cash. Why I love these 2 stocks

Image: Howden Joinery: Fair use

Every investor looks for something different in his or her holdings, but personally the first thing I look for is above-average margins. High margins mean either the business is incredibly well run or customers find paying a premium for its product worth the extra cash. Either way shareholders win.

Who knew margins could even get this high?

Both of those options are true in the case of one of the best businesses on the LSE, Rightmove (LSE: RMV). To see this in action it’s worth visiting the company’s full-year 2016 results.

 

2015

2016

Site traffic (time in billions of minutes)

11.1

11.7

Average revenue per agent (£)

754

842

Revenue (£m)

192.1

220

Operating margin

71.4%

73.4%

The key for Rightmove’s success is a stellar product, in this case the UK’s leading property portal with 77% market share. As we move down the chart we see that as consumers spend more time on the site, agencies are willing to pay a premium for access to these eyeballs. This together with more agency partners, of course, leads to higher revenue. And given the company’s asset-light business model, margins naturally improve.

The other benefit of an asset-light business that doesn’t need to invest in big capital projects is reliable and growing cash flow. And Rightmove shareholders have come to love this as management returns the vast majority of its cash to them each year. Between dividends and share buybacks, these returns totalled £131.3m in 2016, an increase of 16% over the prior year. And even after these returns the company still had £17.8m in the bank at year-end.

Investors should expect to pay a premium for such a well run business and Rightmove’s shares are indeed pricey at 25.5 times forward earnings. But with astronomical margins, huge shareholder returns and plenty of growth I reckon that price is worth paying.

Building a bright future for shareholders

A more under-the-radar option that has the same characteristics is Howden Joinery (LSE: HWDN), which supplies builders with kitchens for both new homes and remodels.

 

2015

2016

Revenue (£m)

1,220

1,307

Operating margins

18.1%

18.1%

Shareholder returns (£m)

105.2

145.4

Net cash

226.1

226.6

As we see, the company is growing at a steady clip due to organic growth (4.2% year-on-year in 2016) and the addition of new depots to its existing estate. At year-end it had 642 depots in the UK, was planning to add around 30 in 2017 and reckons there’s potential for up to 800 in the medium term. On top of this the company is slowly expanding its trial European locations, which suggests that the experiment is going well.

While the company’s margins of 18.1% aren’t as high as Rightmove’s, they’re still a fair sight better than many competitors and point to a management team with a strong focus on profitability. Management’s policy of increasing shareholder returns, while maintaining dividend cover at around 2.5 times earnings and retaining a healthy mountain of cash, is also prudent given the cyclical nature of the housing market.

All told, with growth continuing apace in the UK and Europe, high margins and rising shareholder returns, I believe Howden Joinery is worth a closer look with its shares trading at a relatively cheap 15 times forward earnings.

There's no escaping the fact that Howden's business is a cyclical one though. That's why more risk-averse investors still looking for rapid growth may want to check out the Motley Fool's Top Growth Share of 2017. This company grew sales by 17% last year, continuing its stellar record of growing revenue every single year since going public in 1997.

To discover why the Fool's Head of Investing believes this share could triple in the coming decade, simply follow this link for your free, no obligation copy of the report.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Howden Joinery Group and Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.