Should you buy this monster growth stock and unloved dividend bargain?

Harvey Jones spots a buying opportunity, but also sees the challenges in these two stocks.

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Inchcape (LSE: INCH) published its final results today and the market can’t quite get the measure of them, with the share price down 2.71% at time of writing. The car retailer has been touted as an attractive dividend play, but is it on the road to nowhere?

Inched it

Inchcape’s recent share price performance has been unimpressive, with the stock trading 16% lower than six months ago, amid industry-wide reversals. Today’s results were headlined “A year of significant progress”, but they were not significant enough to get investors excited amid management warnings of challenges ahead.

Highlights included double-digit growth with operating profit up 14% at actual currency rates and a 12% rise in adjusted earnings per share (EPS). It also posted “strong underlying performance” across its distribution businesses, particularly in emerging markets and Asia.

Let it flow

Cash flow generation is positive at £314m, with the full-year 2017 dividend per share up 13% to 26.8p. Investors can also look forward to a £100m share buy-back. Group chief executive Stefan Bomhard hailed the fact that Inchcape now generates 79% of profits through distribution and has doubled its exposure to emerging markets since 2014, making up 21% of the business.

My fellow Fool Royston Wild is sceptical about its prospects as UK consumer spending is squeezed, but Inchcape does have options beyond these shores. However, management is warning of a more challenging year given supply and demand imbalance and new vehicle decline in Singapore. This no doubt accounts for today’s share price drop.

City analysts reckon EPS will fall 3% in 2018, but grow 4% in 2019. Trading at a forward valuation of 10.8 times earnings on a forecast yield of 4%, covered 2.3 times, it looks like one for your watchlist, but not your buy list.

Time for bed

Workwear and textile rental group Johnson Service Group (LSE: JSG) has seen its share price rise an eye-catching 236% over the past five years, although it is down 0.29% today following publication of its preliminary results for the year ended 31 December.

The group, which provides clothing, bedding and table linen for a range of businesses, also posted a “strong financial performance” with revenue up 13.3% to £290.9m, adjusted operating profit up 14.9% to £43.3m, and diluted EPS up 16.9% to 6.9p. The board recommended an 11% increase in the final dividend to 1.9p per share, lifting the total for the year 12% to 2.8p.

Debt question

In January, Roland Head described this as a multi-bagging growth stock I’d hold onto, after management upgraded profits for the second time in four months. His biggest concern was net debt of £90m at the end of June, or four times trailing net profit, and that remains a concern. As of 31 December debt stood at £91.3m although this was down from £98.2m at the start of the year.

2018 could be bumpy for the group, with EPS forecast to fall 1%, before rising 5% in 2019. At a forward valuation of 15.2 times earnings, the group is neither expensive, nor a bargain. The forecast yield is 2.3%, covered 2.9 times. As you can see, management is progressive on this score. Again, one to watch today, possibly buy later. 

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.

Harvey Jones has no position in any of the 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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