This growth stock looks overpriced after its 47% gain

This company’s valuation may be overly optimistic.

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Infrastructure and support services company Stobart (LSE: STOB) has released an upbeat set of interim results. They show that the company is making good progress in a number of key areas, including its airport in Southend. However, its valuation indicates that a great deal of its future growth is already priced-in.

Stobart’s revenue from continuing operations increased by 13% in the quarter. Underlying EBITDA (earnings before interest, tax, depreciation and amortisation) rose by 102% to £20.2m, while underlying pre-tax profit increased from £4.6m to £16.2m.

Stobart’s Southend airport is set to increase passengers per year by as many as 600,000 due to a head of terms that has been signed with CityJet. It will operate flights to up to 18 new destinations starting in April 2017. Furthermore, Stobart Rail has a £61m order pipeline and has won a number of new contracts, while investment in Eddie Stobart continues to perform well.

Looking ahead, Stobart is forecast to increase its bottom line by 17% in the current year and by a further 11% next year. These forecasts are very impressive and show that the company’s strategy is set to continue to pay off.

However, a rising bottom line already seems to have been priced-in by the market as Stobart’s shares have risen by 47% in the current year. This puts them on a price-to-earnings (P/E) ratio of 26.4. When this is combined with the earnings outlook for Stobart, it equates to a price-to-earnings growth (PEG) ratio of 1.9. This is relatively unappealing given the company’s exposure to the UK at a time when the economy’s future is highly uncertain.

A better buy?

Therefore, it may be prudent to invest elsewhere, even though Stobart’s outlook continues to be bright and its quarterly update was positive. One alternative within the industrial transportation sector is Royal Mail (LSE: RMG). Clearly, it’s a very different business to Stobart, but it has considerably greater appeal for long-term investors.

Royal Mail is forecast to increase its earnings by just 3% over the next two years, but its shares offer a wide margin of safety. They have a P/E ratio of 11.7 and this indicates that their downside risk is reduced, while their scope for an upward rerating is high. Furthermore, Royal Mail has European operations that have the potential to perform well. They could benefit from a weaker pound and this may cause a positive translation effect on Royal Mail’s profit numbers over the medium term.

In addition, Royal Mail remains a sound income stock. Its yield of 4.7% may be lower than Stobart’s yield of 7.1%, however Royal Mail’s dividend is well covered by profit at 1.8 times. Stobart’s dividend exceeds forecast earnings, which could mean that Royal Mail’s dividend is more resilient and reliable over the medium-to-long term. Alongside its lower valuation, this makes Royal Mail the better buy of the two companies at the present time.

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.

Peter Stephens owns shares of Royal Mail. The Motley Fool UK has no position in any of the shares mentioned. 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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