Time to take profit on this top growth stock?

Does a sky-high valuation mean it’s now time to sell this top-performing stock?

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Having rocketed 80% in value over the past year before today, few investors in global food and drink concessions operator SSP Group (LSE: SSPG) are likely to be grumbling right now. But does a sky-high valuation suggest that some profit should now be taken? Let’s check this morning’s full-year numbers.

Flying high…for now

In the year to the end of September, revenue climbed 11.7% to £2.38bn (once foreign exchange fluctuations are taken into account) with a 3.1% rise in like-for-like sales the result of growth in air passenger travel and what the company labels as “retailing initiatives“. The latter percentage, when combined with operational improvements and new openings in North America and Asia, allowed SSP to record a stonking 27% jump in operating profit (to just under £163m) over the period. Underlying pre-tax profit soared 38.3% to almost £149m.

While economic uncertainties have led the Upper Crust and Ritazza owner to speculate that revenue will slow in 2018, it also revealed that the new financial year had started in line with expectations. Although its bi-annual payouts to shareholders remain low relative to some companies on the market, today’s final dividend of 4.9p brings the full-year payout to 8.1p — a 50% increase on that returned to investors last year. A further bonus was the announcement of a proposed £100m special dividend in the near future.

With figures like these, it’s really no shock that SSP’s share price rose over 7% in early trading. Factor-in the company’s rising returns on capital employed, excellent free cashflow and captive audience and you begin to understand why investors continue to clamour for the stock.

Nevertheless, with a valuation of 29 times earnings for the next financial year, I’d say a lot of good news is now firmly priced-in. Indeed, with a price-to-earnings growth (PEG) ratio of over 3 for 2018/19 (with anything below 1 indicating good value) and a market cap approaching £3bn, I’m beginning to question how recent share price performance can be sustained.

All told, I wouldn’t blame those with short investing horizons for realising some of their gains sooner rather than later.

A tempting alternative

Those looking for exposure to the general industry in which SSP operates but unwilling to pay up for its stock may be more tempted by cake-specialist and casual dining operator Patisserie Holdings (LSE: CAKE).  

After what feels like an exceptionally quiet period in terms of news, many existing holders will be eagerly looking forward to full-year results from the £310m cap, particularly after May’s interim numbers revealed an 11% rise in revenue and 16% increase in pre-tax profit. Back then, Executive Chairman Luke Johnson declared he was confident in being able to deliver “a successful second half of the yearBy next Monday, we’ll know whether this was achieved.

Even if the recent rise in inflation and reduction in consumer spending (not to mention Brexit-related nervousness) has impacted negatively on trading, I’d still be tempted by the stock. While not screamingly cheap, Patisserie — trading at 17 times expected earnings for the next financial year — is significantly less expensive than SSP Group. Returns on sales and capital employed are also far higher at the debt-free Birmingham-based business.  

While making an investment around results time is a risky strategy, I think any price weakness could be a great opportunity for new investors to take a position.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of SSP Group. The Motley Fool UK has recommended Patisserie Holdings. 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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