It is all too easy to overlook decent growth stocks, even familiar brands like these two. It is even easier if they have fallen out of favour, as these two have. The problem is that many people don’t wake up until well into their recovery, and by then it is too late. So should you invest in these two?
Direct action
Direct Line Insurance Group (LSE: DLG) has endured a bumpy ride this year, with the share price down 11% over the past 12 months. That marks a sharp reversal in fortunes, because when I looked in June it had just posted 77% growth over three years. Direct Line is a strong brand name, as is its subsidiary, Green Flag — strong enough to shun the all-conquering comparison sites. But motor and home insurance is a tough business, with tight margins, stiff competition, and restless customers.
The general insurance sector has also been hit by three successive hikes in insurance premium tax in just 18 months, the most recent in Chancellor Philip Hammond’s Autumn Statement on Wednesday. From next June, it will add 12% to every policy, double the proportion 18 months ago. Insurers can pass on the cost but this may persuade customers to shop around with even greater vigour.
It remains to be seen whether this will reverse Direct Line’s recent pricing improvements, which rose 10% year-on-year in Q3, while gross written premiums increased 4.5%. Direct Line currently yields 3.9%, nicely covered 1.9 times, and trades at 13.5 times earnings. It is in a tough market and Brexit is coming, but people will still need motor and home insurance, even after Article 50 is triggered.
Our friend electrical
Electrical retailer Dixons Carphone (LSE: DC) has had an even tougher year, a share price down 27% over 12 months. It suffered a massive post-Brexit hangover, falling more than a third from 427p to 281p, and has only partially recovered to trade at 330p today. This may seem harsh, given that group chief executive Seb James reported in September that the group continues to see “no detectable impact of the Brexit vote on consumer behaviour in the UK”, with revenue rising 9% in the three months to 31 July.
UK and Ireland like-for-like revenue rose 4% but were thrashed by southern European business growth of 13%, which was driven by Greece, of all places. If Dixons Carphone can make money there, it can surely survive Brexit. There are worries, for example, new iPhone launches are a great driver of new business but the excitement surrounding Apple seems to have ebbed.
High street hero
Whilst the field looks clearer, with competitors such as Phones4U now gone, the danger is that Dixons Carphone will struggle to withstand online competition from Amazon and others, especially given its tight operating margins of just 3.2%.
However, I can see is a need for at least one mobile store with a high street presence. EPS growth forecasts look steady at 4% in the year to 30 April 2017, and 6% the year after. A valuation of 11.3 times earnings seemed a fair price to pay, and the 2.9% yield is covered three times, which suggests there is scope for dividend progression.
