Shares in pub operator Greene King (LSE: GNK) have risen by 9% today after the company released a positive set of first-half results. Notably, the integration of the Spirit pub company is progressing ahead of schedule and Greene King has stated that it now expects to outperform initial guidance for synergies from the deal. This, plus positive like-for-like sales at both the Greene King and Spirit estates, means that the outlook for the business is relatively bright.
In fact, Greene King is forecast to increase its bottom line by 5% in the current year and by a further 13% next year. This puts it on a price to earnings growth (PEG) ratio of only 0.9, which indicates that it offers growth at a very reasonable price. Furthermore, with Greene King yielding 3.4% from a dividend which is covered more than twice by profit, it could prove to be a very appealing income play owing to the potential for rapid dividend increases.
Certainly, Greene King’s balance sheet is highly leveraged, with the company having a debt to equity ratio of 133%. Therefore, with interest rate rises on the horizon, its margins are likely to come under a degree of pressure as the cost of servicing its debt rises over the long term. However, with such an appealing valuation, this risk appears to have been factored in by the market, thereby making Greene King a sound long term buy.
Similarly, easyJet (LSE: EZJ) is also making strong progress as it continues to benefit from a low oil price. While the current ebb in the price of black gold may not continue in the long run, easyJet appears to be well-positioned to continue to grow its top and bottom lines as it muscles in on business travellers and benefits from an improving load factor.
Looking ahead, easyJet’s bottom line is expected to rise by 8% in the current year. This puts it on a PEG ratio of 1.4, which indicates that impressive share price growth is very much on the cards. And, with easyJet paying out just 40% of its profit as a dividend, it could become an excellent income stock in future years even though its current yield of 3.6% is in-line with the yield of the FTSE 100.
While easyJet and Greene King have the potential to rise by 25%+ in 2016, BT (LSE: BT-A) may struggle to replicate 2015’s share price surge of 23%. That’s because this year has been a rather exiting one for the company, with a bid for EE and major customer wins due to deep discounting causing investor sentiment to rise sharply.
In 2016 and beyond, however, the reality of BT’s ambitious expansion plan may be realised since, while it is a logical strategy, the speed at which the company is growing could compromise its profitability and financial soundness. For example, BT’s balance sheet is already less sound than many of its rivals, with it having a relatively large debt pile and a significant pension liability.
Meanwhile, the company’s earnings are due to rise by just 7% next year, which puts BT on a PEG ratio of 2.1. This indicates that it may struggle to post high returns and, as such, other stocks appear to be preferable at the present time.
