My fellow Fools probably don’t need me to tell them that 2013 has been a great year for the stock market.
Indeed, price multiples have risen sharply this year, with a whole host of companies seeing their price to earnings (P/E) ratios heading north at a very brisk pace.
Now, though, could be a good time to focus on companies that are expected to deliver significant earnings growth numbers in 2014, simply because an expansion of price multiples may not be sustained unless growth is forthcoming.
In other words, if growth is priced in and (when it comes) it doesn’t satisfy the market, price multiples could come under pressure.
Bearing this in mind, one company that offers very impressive forecast growth figures for next year is Prudential (LSE: PRU) (NYSE: PUK.US). It is expected to deliver earnings per share (EPS) growth of 21% in 2014, with EPS forecast to increase from 78p in 2013 to 95p in 2014.
Furthermore, with shares trading on a P/E ratio of 16.4 at the time of writing, an increase in EPS of 21% would mean its shares trading 21% higher than their current price level.
Its shares are currently priced at 1,287p. But if the current P/E ratio of 16.4 is maintained and Prudential delivers as per its earnings growth forecasts, they could reach 1,555p, equating to a capital gain of 21%.
In addition, Prudential seems to have substantial scope to improve upon the below average yield that it currently offers. While the yield is just 2.5% at the moment, Prudential has a payout ratio of around 40% which, for a company of its size and stability, seems to be rather low.
Indeed, a payout ratio of up to two-thirds of earnings could be justified, with Prudential still having the required amount of capital to reinvest in the business from such a policy. If Prudential were to increase its payout ratio to around 60% (which would be below the aspirational level recently set by industry group peer Lloyds) then this would equate to dividends per share of 47p and a yield of 3.7%.
This could be even higher next year, when the 21% EPS growth is factored in. Clearly, Prudential has potential and could deliver gains in excess of 21% over the medium to long term.
