Can these 2 FTSE 250 growth stocks justify their valuations?

These FTSE 250 (INDEXFTSE:MCX) stocks are trading at a premium price but is it worth paying? Harvey Jones examines.

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Sometimes a heady share price valuation indicates strong growth prospects, although not always. The following two FTSE 250 companies are giving out mixed messages.

Cop that!

Millennium & Copthorne Hotels (LSE: MLC). What a name. It combines a bizarre mixture of the grandiose (Millennium) and the mundane (Copthorne). Actually, that makes sense, given that its Millennium range is aimed at global travellers in gateway cities, while its Copthorne brand offers “comfortable hotels at a comfortable price“. This also gives the company a foot in two slightly different markets.

What it hasn’t done is drive the share price higher. The £1.46bn company’s share price languishes 4% lower than it was five years ago, yet it trades at a pricey 18.65 times earnings. The business has struggled in the US and in particular New York, according to chairman Mr Kwek Leng Beng, who is now looking to overhaul the US management structure in a bid to reverse underperformance.

Lights out

Group revenues are rising elsewhere, notably in London and New Zealand, although Singapore has been hit by uncertain economic conditions, while geo-political tensions have scared tourists away from Seoul and Taipei. Total Q1 revenue rose 2.3% to £218m at constant currency rates but Millennium & Copthorne has been given a helping hand by foreign exchange tailwinds, which drove revenues up 16.1% to £223m in reported currency. Profit before tax slipped a hefty 38.1% to £21m on a constant currency basis, but by a slightly-less-hefty 27.8% to £13m in reported currency.

It seems to me that investors are being offered a Copthorne investment case at a Millennium price, especially when you examine its disappointing 1.7% yield. But wait, City analysts are more optimistic, earnings per share (EPS) are forecast to rise 25% this calendar year, and 4% in 2018, reducing the forward valuation to 15.8 times earnings. However, I still reckon this is one to sleep on for now.

New Page

PageGroup (LSE: PAGE) provides specialist recruitment services in more than 36 countries and operates across a range of specialist industries, including accountancy, engineering, finance, marketing, offshore, oil and gas, retail, sales and technology.

Formerly known as Michael Page International, the group delivered Q1 gross profits of £170.3m, up 9.1% in constant currency and 19.7% in reported rates. This showed a marked improvement on the 3.8% growth in Q4 as underlying trading improved, albeit helped by a one-off lift from Easter being in Q2 this year, against Q1 last year.

New recruit

PageGroup’s share price is up 20% in the last six months which partly justifies its toppy valuation of 20.26 times earnings. You also get a dividend of 2.52%. Its foreign divisions have been outpacing the Brexit-afflicted UK, with profits up 14.8% in Europe, the Middle East and Africa (EMEA), 15.1% in the Americas, and 26% specifically in France. However, Singapore has inflicted some damage here too, as has Brazil and the struggling financial services sector.

PageGroup boasts a strong balance sheet with net cash of £86m and four consecutive years of healthy EPS growth, which should rise another 11% growth this calendar year and 8% in 2018. By then, the yield is expected to have progressed to 3.8%. This stock could be worth recruiting to your portfolio

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.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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