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Double Or Quits With Tesco PLC, DCC PLC & Amur Minerals Corporation?

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Thin volumes will likely characterise the next few weeks of trade so, from my perspective, you shouldn’t trade shares of Tesco (LSE: TSCO) and Amur Minerals (LSE: AMC) if you really want to enjoy your summer break!

That’s not to say that they may not offer any long-term value, but if I were to add equity risk to my portfolio I’d rather choose DCC (LSE: DCC) — a Dublin-based support services firm whose stock promises a decent mix of capital appreciation and yield. 

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The Rise Of DCC 

If you are chasing sustainable growth and likely earnings upgrades, you’d do well to consider DCC instead of Tesco and Amur. 

DCC’s corporate strategy is flawless, boosted by organic and inorganic growth that supports an attractive valuation. Here are some of the main features of this solid business:

  • Steady margins and cash flows;
  • Limited capital investment requirements;
  • Solid balance sheet metrics;
  • Rising earnings and dividends.

Its first-quarter results ended 30 June, which were released last week, confirmed that most of its divisions are likely to record an impressive performance this year. 

If DCC surprises analysts with higher operating cost savings and a steeper rise in revenues, or both, its shares could continue their formidable run, while their forward valuation, based on net earnings (P/E) multiples, could drop below 20x from current estimates at 23x P/E. 

That’s a distinct possibility if its latest acquisition of Butagaz delivers synergies, as it seems likely. Its track record is impressive: DCC’s stock price has risen 46% since the turn of the year and has doubled in value over the last two years.

Finally, it is forecast to deliver a forward yield of 2%. 

Amur: It’s Time To Deliver

Amur’s rise and fall has been entertaining to watch (particularly if you were not invested in its stock in recent times!) — on the one hand, Amur is a highly speculative trade that should be on your radar because it has already registered the licence for its benchmark Kun-Manie project. On the other, at 22p a share — which is 100% higher than the level it recorded in mid-May — it must prove that its ambitious plans are not out of whack with reality. 

When it reported its 2014 results at the end of June, Amur said that the total initial capital expenditure of its flagship project “is projected to be $1.38bn, to be expended in a two-year construction period”. It added that “sustaining capital is estimated to be $474m over 15 years.”

That’s a total of $1.85bn — an amount that would scare off even the bravest investor. My advice now is keep an eye on its financing plans.

Tesco: Cheaper Than It Looks? 

Tesco remains a solid restructuring play, in my opinion, although short-term volatility in its stock price shall be expected. 

True, its trading multiples are not particularly attractive: at 220p, Tesco shares change hands at 25x forward net earnings. Still, I do not think that relative valuations are fully reliable at a time when the entire sector’s profits are under strain.

Moreover, if Tesco manages to grow its underlying income at between 5% and 10% annually over the next three years, its net earnings multiples for 2017 and 2018 will fall below 20x and 15x, respectively — a valuation that would render its stock much more attractive.

Cost-cutting measures could do the trick, and the market expects a much higher growth rate, anyway. Given that huge write-downs have already occurred, my opinion is that a 10%/20% upside from its current level is very likely based on the book value of its total assets. 

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

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