The UK’s economic outlook seems to be changing. Higher levels of inflation are here and according to the Bank of England, they could move from their current level of 1.8% to nearly 3% this year. The effect of this on consumer spending could be negative – especially if inflation moves higher than wage growth and consumers find their disposable incomes fall in real terms.
Despite this, some companies could benefit from higher inflation. Here is a prime example of such a stock which could be trading 75% higher by 2019.
The company in question is Utilitywise (LSE: UTW). It helps businesses to cut their energy consumption and reduce the amount they spend on energy. This service could become more popular this year, as lower consumer spending may mean the UK’s wider economic performance suffers. As such, businesses across the UK may seek to reduce costs in order to offset potential falls in revenue.
Utilitywise reported on Tuesday and it seems as though it is performing relatively well. It has performed in line with expectations in the first six months of the current financial year, with double-digit revenue growth compared to the same period of last year. Its main Enterprise division, which represents 94% of adjusted profit before tax, saw a strong performance. This fully offset a tough period for the Corporate division, where delays to the deployment of technology held back its progress.
Looking ahead, Utilitywise is expected to record a rise in its bottom line of 19% in the current financial year. It is then forecast to follow this up with further growth of 14% next year. Despite this upbeat outlook, it trades on a price-to-earnings (P/E) ratio of just 11. This is low when compared to its average P/E ratio of 14.5 over the last five years. If the company can meet its forecasts and if its P/E ratio reverts to its recent average, it could lead to a share price gain of over 75% in the next two years.
Similarly, sector peer Go Compare (LSE: GOCO) offers a relatively low valuation. It concentrates on the consumer sector, as opposed to Utilitywise’s focus on the business segment. Go Compare is expected to record a rise in its bottom line of 22% in the next financial year. With a P/E ratio of 15.9, this equates to a price-to-earnings growth (PEG) ratio of only 0.7. This suggests there could be further growth on offer following the company’s 45% rise in the last three months.
Certainly, consumer spending could come under pressure this year. But since Go Compare and Utilitywise seek to reduce costs for individuals and businesses respectively, they could be beneficiaries of a deteriorating UK economic outlook. In other words, they could offer defensive characteristics which may prove useful during the course of an uncertain 2017. As such, buying them now could prove to be a shrewd move, with their wide margins of safety suggesting limited downside and significant capital gain potential.
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Peter Stephens has no position in any shares mentioned. 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.