2 undervalued growth stocks that could make you a million

Here are two very different growth stocks, both of which could reward you well.

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What makes a growth share undervalued? That can be hard to decide, as they’re often accompanied by high P/E multiples — but when we’re looking at impressive earnings expectations, that can still be cheap.

Look at Cambian Group (LSE: CMBN), which describes itself as “one of the largest providers of specialist behavioural health services for children in the UK“.

The shares haves been erratic over the past few years, but that’s not surprising as we’ve been seeing growing pre-tax losses for four years in a row now. But the company has decided to sell off its non-core adult services division and focus on its key children’s services, and that strategy looks like it’s paying off. 

Pre-tax profit this year is forecast to come in at £15.9m, rising to £18.8m for next year, with earnings per share predicted at 5.8p and 7.4p for the two years respectively.

Cash to come

The balance sheet is stronger after the adult services disposal raised £379m in cash, which enabled the settlement of all bank debt. At the end of 2016, net cash stood at £116m, and Cambian announced its intention to return £50m in excess capital to shareholders.

That’s going to be in the form of a special dividend, and while there’s been no ordinary dividend for a few years, at full-year results time we heard that the company “intends to resume its progressive dividend policy this year and expects to pay an interim dividend for the first six months.

The 171p shares are now on a forward P/E of 25, dropping to 22 for 2018, but with PEG multiples of 0.2 and 0.8, and looking at Cambian’s impressive turnaround, I think that’s cheap.

Share price dip

The RPC Group (LSE: RPC) share price has been falling back this year, from a peak of around 1,075p to today’s 766p — but that still represents a very nice 178% gain over the past five years.

The manufacturer of plastic packaging and containers has grown its EPS from 34.4p in 2013 to an impressive 62.2p last year, and with rises of 10% and 8% forecast for the years to March 2018 and 2019 respectively, we should see that grow to around 74p — and that’s a tempting growth prospect.

Surprisingly, RPC shares are on undemanding forward P/E ratios, of just 11 for the current year and dropping to 10.2 next — and that’s with above average dividend yields of 3.4% and 3.8% pencilled-in.

Debt

There is some significant debt on the books, amounting to £1,049m at the last year-end — though the company did describe its balance sheet as strong, after a year in which it raised new equity to cover two acquisitions. Debt stood at 1.8 times EBIDTA for the prior year, and the firm reckoned it had total finance facilities of £2,245m available at 31 March.

I’d like to see debt reduced (simply because it can place a company at risk in the event of any downturn in business), but that level seems fine from a liquidity standpoint and I don’t see any immediate problem.

The firm’s acquisitions, which include including British Polythene Industries and Global Closure Systems, appear to be integrating well, and the global future for the plastics business is surely strong.

With last year’s results looking good and analysts buoyant over RPC’s future, I see the price fall since January as providing a nice buying opportunity.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended RPC Group. 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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