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Breedon Group (LSE: BREE) just can’t keep still. Over the past five years, the construction materials firm’s pre-tax profit has risen nearly tenfold thanks to a combination of organic growth and bolt-on acquisitions. 

Today the company announced yet another deal. It has agreed to acquire from Tarmac four quarries and an asphalt plant for a total consideration of £16.5m. These assets will be paid for by the transfer to Tarmac of 27 of Breedon’s ready-mixed concrete plants and a payment of £4.9m in cash.

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This deal is part of the firm’s aim to expand its aggregate portfolio and streamline its ready-mixed concrete network. While it’s not expected to have a material impact on earnings, the deal does add approximately “25m tonnes to the group’s mineral reserves and resources.

According to CEO Pat Ward: “This deal brings significant benefits: it adds to our reserve base; it is margin-enhancing; it releases value from peripheral ready-mix plants; and it will enable us to replace third-party aggregates providers with our own sources of supply.

A good fit for the group

I have every confidence in management and believe that this deal is in the best interest of shareholders. You see, over the past five years, Breedon’s growth has been nothing short of impressive, and shareholders have been well rewarded. Since December 2012 the stock has returned 320%!

It has established its self as the UK’s leading construction materials group, which gives it a strong base to grow from in the years ahead. City analysts are projecting earnings per share growth of 14% for each of the next two years. If growth continues at this rate, earnings per share will have doubled within five years. And if the company can double earnings per share in that period, the shares look highly attractive today. 

Doubling 2016’s earnings of 3.5p per share gives 7p, or a forward (five-year) P/E of 12. For the past half-decade, the shares have traded at an average P/E of 28. If the valuation returns to this level, shares in Breedon could hit 196p, a gain of 133% from current levels. 

Undervalued growth 

Keller Group (LSE: KLR) can’t boast the same historical growth as Breedon, but during the next few years, shares in the engineering firm look set to produce huge returns for investors. 

It is the world’s largest geotechnical contractor, providing technically advanced geotechnical solutions to the construction industry, a highly specialist line of business. Since 2012, the company’s earnings per share have doubled as it has expanded into new markets, but earnings are lumpy. 

For example, this year is expected to be a record one for the group’s Europe, Middle East, and Asia arm thanks to a $180m contract in the Caspian region. However, after this contract is completed at the end of 2017, profit in 2018 is expected to be “materially below what should be an excellent 2017 result.

The unpredictability of earnings is holding back Keller’s shares. Right now the stock is trading at a forward P/E of 10.6, despite analyst expectations for earnings growth of 18% this year. 

Still, in my opinion, Keller’s low valuation offers an opportunity for value investors. If the company can replicate its performance of the past five years, and double earnings per share again, the shares could double from current levels. 

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Rupert Hargreaves owns no share 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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