Finding stocks which can offer long-term capital growth at a reasonable price is never easy. After all, companies which have strong growth prospects generally become more popular among investors. This drives up their share prices and leaves a narrower margin of safety for new investors. While the FTSE 100’s price rise means this situation has arguably worsened in recent months, there are still a number of stocks which could be worth buying for the long term. Do these two companies fit that description?
Trading update
Reporting on Monday was component, modules and services designer and supplier Avingtrans (LSE: AVG). It announced an additional contract option with Sellafield. The contract is worth an extra £11m in revenue to the business, the majority of which is expected to be spread equally over the three years to 2021. It builds upon the company’s 2015 contract with Sellafield, which was worth up to £47m over a 10-year period.
As well as the announcement of a contract win, Avingtrans also reported that revenue for the year to 31 May was slightly behind management outlook. Despite this, it closed the year with adjusted profit before tax that was marginally ahead of internal expectations. It also has net cash of £26.2m and a strong order book for its Energy and Medical division.
Looking ahead, it is expected to record a rise in pre-tax profit of around 300% in the current financial year. Its pre-tax profit is due to rise from £0.3m last year to £1.2m in the 2018 financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it could offer enticing share price growth alongside relatively high risk.
Valuation challenges
While Avingtrans may offer a wide margin of safety at the present time, actuator manufacturer and flow control company Rotork (LSE: ROR) seems to be highly priced. Although it has upbeat earnings growth prospects of 8%-9% per annum during the next two years, its valuation seems to fully factor-in its outlook. For example, it trades on a price-to-earnings (P/E) ratio of 24.2. This translates into a PEG ratio of 2.8, which is high, even at a time when the FTSE 100 is close to an all-time record.
Certainly, Rotork is a high-quality business which has a sound track record of growth. However, its shares seem to offer little upside potential after rising by 23% during the course of the last year.
Furthermore, their income prospects may also be somewhat limited. The company currently yields 2.3% from a dividend which is covered 1.9 times by profit. This indicates that while there is dividend growth potential on offer, there may be stronger options available elsewhere. A number of stocks currently have higher yields than inflation, while others have more scope for rapid rises in shareholder payouts. As such, it may be worth awaiting a lower share price before buying a slice of Rotork for the long term.
