3 undervalued growth plays: Barclays plc, Ashtead Group plc & Vp plc

These 3 stocks offer growth at a reasonable price: Barclays plc (LON:BARC), Ashtead Group plc (LON:AHT) & Vp plc (LON:VP).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Massively undervalued

Barclays (LSE: BARC) shareholders are going through yet another tough year. Annual pre-tax profits fell 8% last year, and shares in the bank have lost 22% of their value since the start of the year. What’s more, the income that shareholders crave, in the form of dividends, has been cut by 54%, to just 3p a share for 2016.

But while it is true that these recent trends seem a worrying sign that profitability will remain weak for some time, I believe the firm is firmly set on a path to recovery. Barclays has made tremendous progress to wind down its “bad bank””— non-core risk-weighted assets (RWAs) have been almost halved over the past two years — and the bank has put many of its legacy misconduct and litigation issues behind it.

Profits from core franchises, its UK retail bank and Barclaycard, are chugging along nicely, up 6% and 18%, respectively. Its investment bank will take longer to repair, but there are signs of progress. The division’s return on equity was just 5.6% in 2015, but attributable profits doubled to £804m.

Shares in Barclays seem massively undervalued, trading at just 0.46 times book value. On earnings, valuations are attractive too. City analysts have a consensus forecast for underlying EPS of 14.4p, which would give its shares a very agreeable forward P/E of 11.9.

In the following year, earnings is set to bounce back strongly, with forecasts of underlying EPS of 20.7p. This represents a 44% increase on its 2016 estimate, and would mean its forward P/E would fall to a remarkably low 8.3 times.

Growth still healthy

Equipment rental firm Ashtead Group (LSE: AHT) has a great track record of delivering growth. Between 2011 and 2015, underlying operating profits grew by a compound annual growth rate (CAGR) of 54%, while revenues expanded by a CAGR of 21.1%.

Looking forward, Ashtead will struggle to grow earnings as quickly, while the construction sector enters the slower growing mid-cycle phase. But I’m still bullish that Ashtead’s future earnings will continue to grow at a healthy rate. The firm has a strong focus in the speciality sector, where low rental penetration means there is opportunity to grow market share. Furthermore, margin expansion from improved operating efficiency will likely offset some of the impact of a slowdown in revenue growth.

City analysts seem to agree. The consensus forecast for this year’s underlying EPS growth is 28%, which would give its shares a forward P/E of 12.1. By 2017, its forward P/E could drop to 11.1, on forecasts of another 8% increase in earnings. I reckon this is decent value given Ashtead’s attractive growth outlook.

Catch up on margins

Ashtead’s small-cap rival Vp (LSE: VP) could be poised for more sizeable returns. Vp’s greater focus on the UK market means it’s better placed to benefit from a growing housebuilding sector and a potential pick-up in water infrastructure spending, in line with the industry’s new five year asset management programme.

Vp is not as profitable as its larger rival – Vp’s EBITDA margins is 28%, compared to Ashtead’s 47% – but this means there’s room for Vp to catch up on margins. This is particularly important now, because in a slowing market, improving operating efficiency and asset optimisation become more valuable drivers of growth.

Vp trades at a slight premium to its larger peer, with shares trading at 12.7 times 2015/6 earnings, and 11.9 times 2016/7 expected earnings.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has a position in Barclays plc. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Investing £5,000 in a Nasdaq 100 index fund 5 years ago would be worth this much now

Zaven Boyrazian looks at the Nasdaq 100 index’s performance since December 2019. Has investing in an index fund been good?

Read more »

Electric cars charging at a charging station
Investing Articles

Why the Tesla share price rocketed 38% in November

Our writer considers the reasons for the recent red-hot Tesla share price performance. Is now a good time for him…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
US Stock

Why NIO stock fell 13% in November

Jon Smith flags up a couple of key factors that he believes contributed to the fall in NIO stock over…

Read more »

Investing Articles

Which of these UK stocks is the better bargain in December?

Stephen Wright thinks Diageo and Senior are very different UK stocks with very similar prospects. But which one offers better…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Investing Articles

Mistakes to avoid when investing in the FTSE 100!

The FTSE 100 offers great near-term valuations and dividend yields, but Dr James Fox believes investors should be wary when…

Read more »

Investing Articles

Here’s why the Scottish Mortgage share price jumped 9.2% in November

The Scottish Mortgage share price has been outperforming indexes over recent weeks. Ben McPoland digs into some reasons why.

Read more »

Investing For Beginners

Why the IAG share price rocketed 24% in November

Jon Smith explains why the IAG share price did so well last month, citing three factors at work that helped…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

I think Tesla stock’s overpriced. So why not short it?

Our author thinks Tesla stock has got ahead of itself since the US election. So why not put his money…

Read more »