IQE plc is one stock I’d buy and hold for the next five years

Royston Wild explains why IQE plc (LON: IQE) is on course to deliver stunning shareholder returns.

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IQE (LSE: IQE) has proved to be a winner for growth hunters in recent years, the company regularly doling out double-digit earnings expansion over the past five years. But I believe things could be about to really hot up.

IQE, which is a leading player in providing wafer products and services to the global semiconductor industry, declared in its July trading statement that revenues hit £70m during January-June, with overall wafer sales having risen by around 16%.

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While the business continues to enjoy solid broad-based demand — IQE saw revenues rise in its three main markets of Wireless, InfraRed and Photonics — it is this latter area that investors are getting particularly excited about.

Sales here rose by double-digits in the first half thanks to a significant increase in the supply of vertical cavity surface emitting laser (VCSEL) instruments for mass-market applications. And IQE is in the process of boosting capacity to meet ballooning demand for its technologies.

The Cardiff company believes that “the start of the mass-market ramp for VCSEL wafers marks an inflection point in the commercialisation of this technology.” And it has inked a number of multi-year contracts in this area which it says “reflects its strong competitive advantages including its technology leadership and its proven track record in delivering wafers into high volume consumer markets.”

Pricey but compelling

The City also takes a positive view of its earnings prospects, certainly in the short-to-medium term.

In 2017 the Welsh business is predicted to punch a modest 1% earnings advance. But this profits slowdown is expected to prove a temporary phenomenon, and the number crunchers are predicting a 14% improvement in 2018.

Value hunters may be put off by a subsequent forward P/E ratio of 39.3 times, but this is part and parcel of high-growth tech stocks like IQE.

Furthermore, there is a great chance that the City will take the green pen to its forecasts for IQE as demand for its goods cranks higher. The firm recently commented that it would likely “exceed market expectations for the full year” in light of recent progress, and added that “whilst it remains early into the start of the mass-market adoption of our technology, it is possible that with the current contract momentum, a more significant upgrade to current market expectations could be delivered for 2018.

Growth giant

Those seeking stocks with promising long-term growth potential should also to check out Halma (LSE: HLMA), in my opinion.

The number crunchers expect bottom-line expansion to be pretty subdued over the next couple of years, however, and earnings rises of 3% and 4% are predicted for the years to April 2018 and 2019 respectively.

But Halma has a knack of grinding out profits growth, the company setting new sales and profits records for 14 years on the spin. The Amersham firm saw revenues detonate 19% in the last fiscal year, to £961.7m, and witnessed particularly strong demand growth in the US, Europe and Asia Pacific.

Like IQE, the FTSE 250 star is not exactly cheap on paper — it currently sports a prospective P/E rating of 26.2 times. Still, I reckon that the soaring popularity of its products across the globe, not to mention its ability to deliver growth year after year, means that Halma is worthy of this elevated ratio.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Halma. 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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