Growth shares can offer stunning share price gains. Investors seem more willing to upgrade the valuation of a stock that has fast-growing profit than for any other reason. However, finding companies which offer strong growth potential at reasonable prices can prove challenging. Here is one stock which seems to offer just that, and another which I think may be overvalued at the present time.
High valuation
Reporting on Thursday was money-saving specialist Moneysupermarket.com (LSE: MONY). Its trading update showed a somewhat mixed performance among its various divisions. Its Insurance segment recorded a rise in revenue in the first quarter of the calendar year of 23%, with a buoyant switching market being a key driver. However, its Money division reported a fall in revenue of 2%, which was mostly down to a lack of repeat switching deals in the current account sector versus last year.
However, the performance of Moneysupermarket.com’s Home services division was disappointing. It declined by 45% as a result of a lack of an energy collective switch in the quarter. This also negatively impacted the MoneySavingExpert.com division, where revenue declined by 4%.
Looking ahead, the firm is forecast to record a rise in its bottom line of 8% in the current year. It is due to follow this with growth of 10% next year. This indicates that the company’s performance as a business remains strong, but this may not be translated into a rising share price.
The reason for that is a valuation which appears excessive, even when its growth outlook is factored-in. The company’s shares trade on a price-to-earnings (P/E) ratio of 21.5, which suggests it may be a stock to avoid for now.
Improving performance
Also reporting on Thursday was technology components manufacturer Senior (LSE: SNR). Its trading in the period since 1 January has been in line with expectations, with an improvement anticipated in the second half of the year. That’s because of the transition from more mature aerospace programmes to the new airframe and engine products, which could lead to rising profitability in the Aerospace division later on this year.
Senior is also targeting improved operational performance as it continues with its cost reduction focus, particularly for its newer programmes. It anticipates progress from 2018 onwards, with its Aerospace and Flexonics programmes and products due to enter production.
In fact, the company’s bottom line is expected to rise by 13% in the 2018 financial year. This puts it on a price-to-earnings growth (PEG) ratio of just one, which indicates that share price growth could be ahead. With a dividend yield of 3.3% which is covered twice by profit, shareholder payouts could grow rapidly in future. At a time when inflation is rising, this may lead to improved share price performance versus the FTSE 350 in the long run.
