One growth stock I’d buy over IWG plc

IWG plc (LON: IWG) may be upbeat about its prospects after last month’s profit warning but Edward Sheldon has picked out a ‘high-momentum’ growth stock he likes more.

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IWG (LSE: IWG), formerly known as Regus, made financial news headlines back in mid-October when it released a profit warning. The FTSE 250 firm, which specialises in flexible workspace solutions, announced that an expected sales improvement in the third quarter had failed to materialise, and that “weakness in London” and disruption as a result of natural disasters in overseas markets had hit its performance. The group stated that operating profit for 2017 was likely to be “materially below market expectations and in a range of £160m to £170m.”

30% fall

The market has been punishing profit warnings quite harshly recently, and IWG didn’t escape lightly. Its shares fell over 30% in the blink of an eye as a result of the warning. Since then, they have continued to trend lower and can now be bought for below 200p. At that price, do the shares offer good value, or is the stock one to steer clear of?

Analysts now expect it to generate earnings of 12.9p for 2017. A dividend payment of 5.4p per share is anticipated. At the current share price, the stock trades on a forward P/E ratio of 15.4 with a prospective dividend yield of 2.7. In my view, those metrics look relatively appealing for a company that has almost doubled its top line over the last five years, and increased its dividend 10 years in a row. The company has stated that it remains “very positive” about the opportunity for the workspace as a service (WaaS) market and its leading position within it.

Having said that, the thing about profit warnings, is that they’re not always a one-off. While the idea that they always ‘come in threes’ may be a bit of a myth, studies from Stockopedia and Ernst & Young have shown that there’s a 30%-40% chance of a company reporting a further profit warning after the first. With that in mind, I’d be reluctant to invest right now, until we see evidence that IWG has its momentum back.

Surging ahead

One FTSE 250 company that does appear to have significant momentum at present is Diploma (LSE: DPLM). It’s shares have surged 11% today on the back of its full-year results released this morning.

Diploma specialises in providing technical products and services for a variety of applications, including consumables and instrumentation to the healthcare sector, and seals, gaskets and cylinders for heavy mobile machinery and industrial equipment. The company has been a strong performer over the last five years, with revenues rising 66%, and today’s full-year FY2017 results demonstrate further momentum, beating analysts’ expectations.

Indeed, for the year ended 30 September, revenue rose 18% to £452m (vs £443m expected), and profit before tax surged 24%. Adjusted earnings per share increased 10% to 49.8p (vs 48.3p expected) and the company lifted its dividend by a healthy 15% to 23p per share. Chief Executive Bruce Thompson commented: “With a proven business model, broad geographic spread of businesses, robust balance sheet and consistently strong free cash flow, the Board is confident that further progress will be made in the next financial year.

While the stock trades on a punchy P/E ratio of 23.8 after today’s rise, given its strong momentum, and the fact it has broken out to new highs, I wouldn’t rule out further gains going forward.

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.

Edward Sheldon 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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