Billionaire US investor Warren Buffett believes that it’s better to buy “a wonderful company at a fair price than a fair company at a wonderful price”.
The two companies I’m looking at today have both delivered gains of more than 60% over the last year, during which the FTSE 100 has risen by just 7%. Are these the kind of great stocks at fair prices we’re looking for?
“A strong pipeline”
Manufacturing group IG Design (LSE: IGR) produces giftware, stationery and toys which are sold in more than 80 countries. For example, it sold more than 40m pens and pencils and 80m Christmas crackers last year.
Last year’s sales totalled £311m, and generated underlying earnings per share of 18.2p. Broker consensus forecasts suggest that sales this year will rise by 4.5% to £325m, while earnings are expected to rise by 11.5% to 20.3p.
Today’s first-quarter trading update suggests to me that the group’s management is confident of delivering on these forecasts. IG says that performance so far this year has been in line with expectations, while the group’s order book is said to be “at record levels”.
Upgrade likely?
IG Design is hoping to improve profit margins by tweaking product ranges and improving its manufacturing processes. Management is also on the lookout for acquisition opportunities. The group’s return on capital employed has risen from 9.1% to 15.1% since 2014, suggesting these plans are working.
In my view, the wording of today’s statement suggests that chief executive Paul Fineman and his team are very confident about the year ahead. If trading continues on this basis, I think there’s a good chance that broker forecasts will be upgraded over the next six months.
The shares trade on a forecast P/E of 18 at today’s price of 385p. But I think there’s a good chance this valuation could end up looking cheap as IG continues to grow. In my view, the shares remain worth buying.
Rising expectations
Distributing a range of more than 500,000 electronic and industrial products requires great organisation and large scale to be profitable. Electrocomponents (LSE: ECM) appears to tick both of these boxes.
Sales totalled £1,512m last year, and the firm says its RS Components business is the number one distributor for engineers across Europe and Asia Pacific. The group also has a US business that’s growing strongly.
Last year’s results put Electrocomponents on a pricey trailing P/E of 30, with a dividend yield of just 1.9%. But group sales rose by 13% during the three months to 30 June, and broker forecasts suggests that earnings per share could rise by 18% this year and by 12% next year.
That gives the stock a forecast P/E of 25 for 2017/18, falling to a P/E of 22.5 in 2018/19. While that’s not cheap, I believe this company has many of the same qualities that make IG Design attractive — improving profitability, large scale and strong cash generation.
It’s worth noting that earnings forecasts for the current year have risen by 46% since last August. The group’s strong growth in the US and Asia suggests to me that this momentum could continue. I believe the shares could prove to be a profitable buy at current levels.
