IQE (LSE: IQE) has increased its earnings per share (EPS) by 116% since 2012. Meanwhile, a 345% rise in its share price reflects not only the growth in earnings, but also the market’s willingness to pay a significantly higher price for them.
The reason for this is that IQE is the leading global supplier of advanced wafer products and services to the semiconductor industry and looks to be at an inflection point in its history thanks to the rise of the Internet of Things. The company’s unparalleled breadth of intellectual property and rising customer base across multiple technologies and multiple end markets give it the potential to deliver a massive acceleration of growth in the coming years. Indeed, chief executive Drew Nelson said recently: “IQE’s outlook has never looked better.”
Attractive risk-reward proposition
City analysts see modest EPS growth for the current year, an acceleration to over 20% next year and then in excess of 100% in 2019. At a share price of 140p, the current-year price-to-earnings (P/E) ratio is 43, but if the projections for 2019 are on the mark, the P/E comes down into the teens.
Some investors believe the valuation is too expensive but I think the potential for growth is of such magnitude that the shares are well worth buying at the current price. What I particularly like about the risk-reward proposition here is that it’s not a binary blue-sky bet. The company is profitable and growing, which means that even if growth doesn’t come through at the rate forecast, a de-rating of the shares appears a more likely outcome than a total collapse.
Excellent record
International specialist insurer Hiscox (LSE: HSX) is another company that’s more than doubled its earnings in five years, EPS having increased 126% since 2012. Its share price has risen 140%, largely reflecting the growth in earnings.
In a trading update released today, covering the nine months to 30 September, the company reported a 12.4% increase in gross written premiums to £2.1bn, with a strong performance across all segments. Successful and conservatively-managed, Hiscox reminded us that, in what has been an historic year for major catastrophes, “our long-held strategy of balance and diversity was built for this environment, as our retail businesses provide stability when volatility impacts the big-ticket areas.”
Management’s previous early estimates for net claims of $225m for Hurricanes Harvey and Irma have proved to be prudent, with that sum now estimated to also cover claims for Hurricane Maria. Of course, this will hit this year’s profits, but after a decade of rate reductions in this area of business, the company is seeing signs of a hardening market, which bodes well for the future.
Looking ahead to 2018, City analysts are forecasting EPS of 76.5p, giving a P/E of 18.4 at a current share price of 1,410p. Hiscox may not have the supersonic potential of IQE, but with an excellent record of earnings and dividend growth (the running yield is 2%), as well as a strong balance sheet, this is a business I’d be happy to buy a slice of.
