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Are these FTSE 250 growth stocks just too pricey?

Photo: Bob Castle. Cropped. Licence: https://creativecommons.org/licenses/by-nd/3.0/

Everybody likes growing companies, but nobody wants to pay too much for them. These two FTSE 250 companies aren’t cheap as measured by their P/E ratios, but are they good value?

Tempting trade

Auto Trader Group (LSE: AUTO) has a firm grip on the UK and Ireland’s vehicle sales market, with more than 80% of UK motor retailers advertising on its site. Turning that into share price growth is rather more slippery, with the stock up just 2.38% over the last year, against more than 20% across the FTSE 250 as a whole. It bounced back quickly from the Brexit shock, but growth has flatlined since.

Full-year results published last week offered plenty to celebrate, but there was one thing to worry about. Revenue rose 9% to £311.4m, profit before tax rose 23% to £193.4m and basic earnings per share (EPS) rose 22% to 15.64p. Average revenue per retailer per month climbing £162 to £1,546. Despite these goodies, investors chose to fret over the larger-than-expected 2% drop in the number of retailers advertising on the Auto Trader marketplace, from 13,514 in 2016 to 13,296, mainly in the smaller and non-car related markets.

Auto suggestion

Chief executive Trevor Mather warned that after a number of years of near uninterrupted growth, the industry now expects new car registrations to plateau or decline, although used car transactions should continue to grow.

Auto Trader’s forecast yield is just 1.4% but management is progressive. Its proposed final dividend of 3.5p per share is more than double the 1.5p paid in 2016. Last year it also served up £102.1m of share buy-backs. Today’s valuation of more than 30 times earnings is forecast to shrink to 23.8 times, which is still expensive, but on the plus side forecast EPS growth looks strong at 14% in 2018 and 13% in 2019. Today’s price may just be worth paying, provided the UK economy can keep motoring.

The aviator

BBA Aviation (LSE: BBA) has been flying lately, its share price up 50% in the past year, and 110% over five years. The company, which employs 15,000 people at more than 300 locations worldwide, has significant operations in the US and is expanding in Europe, Asia, South America and Africa. Last month’s trading statement showed revenue up 19% year-on-year due to acquisitions and organic growth. However, it was lifted by currency tailwinds, with growth falling to 2% at constant exchange rates, after also adjusting for fuel prices and before acquisitions and disposals.

BBA Aviation is organised into two main business groupings: flight support, where revenues grew 26%, and aftermarket services and systems, which grew 4% but was flat on an organic basis. Given the currency contribution I find the recent share price surge hard to justify, and today’s valuation of more than 20 times earnings a little toppy. Its PEG ratio also looks pricey at 2.6, although this is forecast to fall to a more amenable 0.8.

Down to earth

BBA Aviation needs to keep growing to justify its valuation, and EPS forecasts are promising, at 19% in 2017 and 8% in 2018. By then the yield is expected to have hit 3.7%. This is one to watch, perhaps the time to buy is during a spot of market turbulence.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.