Why these FTSE 250 stocks could deliver significant gains in 2017

Roland Head takes a look at two FTSE 250 stocks with serious growth potential.

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After climbing 68% in five years, the FTSE 250 currently trades on a P/E of 19. In comparison, the FTSE 100 has risen by just 23% over the same period, but trades on a P/E of 33!

These figures show that FTSE 250 companies have collectively delivered stronger earnings growth than their big cap peers since 2011. But is there still value in the mid-cap index?

In this article, I’ll look at two FTSE 250 stocks which I believe could be a profitable investment in 2017.

A tasty dividend hike

Shareholders in engineering software group Aveva Group (LSE: AVV) will find that this year’s interim dividend is much bigger than it was last year. The company said this morning that it will pay an interim dividend of 13p per share this year, up a whopping 117% from 6p per share last year.

Unfortunately, this increase won’t be continued in the final dividend. What’s happening is that Aveva plans to distribute dividend payments more evenly throughout the year, rather than having a small interim and a large final payment. Aveva’s total dividend is expected to rise by 3.8% to 37.4p this year, giving a forecast yield of 2.1%.

Tuesday’s interim results from Aveva were a mixed bag. Revenue rose by 3% to £84.3m, but adjusted pre-tax profit fell by 2% to £9.1m. Perhaps the best news was that the company’s net cash balance rose by 18% to £124.4m, as a result of an 18% rise in net cash from operating activities.

According to management, the impact of weak trading in the oil sector has been offset by the weaker pound, which has boosted the value of Aveva’s US dollar earnings.

The outlook for Aveva remains uncertain. Merger talks with French group Schneider Electric collapsed in the summer. Management warned today that the group faces “tough trading conditions”.

I’m reassured by Aveva’s strong cash generation and its stable performance. But with earnings growth of less than 10% expected next year, I think the shares’ 2017/18 forecast P/E of 23 is high enough.

High flyer could climb further

BBA Aviation (LSE: BBA) provides support services such aero-engine maintenance, refuelling and ground handling for aircraft operators.

The $1.2bn acquisition of US rival Landmark Aviation has contributed to a 27% rise in year-on-year group revenue during the first ten months of this year. The “vast majority of actions” needed to secure cost savings of $35m from the deal are now complete, the company says.

Management expects full-year performance to be in line with expectations. Based on the latest broker forecasts, earnings per share are expected to rise by 13% this year and by 18% in 2017. The shares trade on a 2016 forecast P/E of 16.5, with a forecast yield of 4%.

In my view, the main factor stopping BBA shares from rising further is the group’s net debt. This stood at $1,437m at the end of June. That’s pretty high relative to forecast net profit of $189.4m. However, I expect debt to start falling in 2017, helped by a $202m cash payment due from the sales of its ASIG commercial aviation services business.

If I’m right, then I think BBA could deliver further gains from current levels.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended BBA Aviation. 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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