I view mid-cap healthcare company BTG (LSE: BTG) as a growth company because it doesn’t pay investors a dividend. If all the incoming cash flow is being ploughed back into the business to build it up and grow earnings – as a ‘no dividend’ policy suggests – we can only judge the stock’s value based on the earnings growth and share-price appreciation it produces.
A disappointing outcome
Earnings growth stuttered along over the past four years but annual double-digit percentage increases just haven’t been a consistent feature, and the market has compressed the firm’s valuation. The share-price chart looks like the stock moved sideways. But in January 2015 the share price stood at 812p and today’s trading update sent it down more than 17% to stand around 548p as I write – a disappointing outcome for investors who have been faithful to the BTG story.
Today’s news is that the trading year to March 2018 produced revenue “in line with expectations.” However, to many, the big hope is that the firm’s varicose vein treatment Varithena will take off in a big way in the US to produce more of those double-digit earnings gains that we all hanker for. Getting the stuff moving over there has been a frustrating experience for the firm and today we learned that “growth in Varithena sales was offset by lower sales of the PneumRx Coils.” So even as Varithena starts to gain traction, its impact on the firm’s results is being neutralised by weakness in other products. After such a long wait and such high expectations, I’m not surprised the market has reacted badly.
BTG is taking an impairment charge of £150m as it marks down the fair value of PneumRx Coils and said “renewed physician interest” means it hopes to have “a better understanding of physician ordering and reordering patterns” for Varithena by the end of 2018 – yet more patience required from long-suffering shareholders.
Grinding on
City analysts predict earnings will lift 10% for the current year to March 2019 and 15% the year after that. Meanwhile, the forward price-to-earnings (P/E) ratio stands at about 15, which looks fair. But I’ve lost my enthusiasm for the stock.
To me, paper-based paper products provider and FTSE 100 constituent Smurfit Kappa Group (LSE: SKG) looks like a better bet. The company is the larger of the two operations and is attractive for its modest valuation, investor dividends and the defensive nature of its business. Today’s share price around 3,034p throws up a forward P/E rating just under 14 for 2019 and the forward dividend yield sits just over 2.8%. Anticipated forward earnings should cover the payment a healthy looking two-and-a-half times.
The firm grinds on making steady progress and City analysts expect earnings to grow 30% this year and 3% in 2019.
In today’s news, the firm announced that it is installing at its Interwell plant in Austria a “revolutionary new industrial-scale HP PageWide C500 digital press for corrugated printing.” The press will be installed in April to support Smurfit Kappa’s “extensive customer base” in the fast-moving consumer goods (FMCG) sector. I think the firm’s operations are embedded in an attractive sector and the stock looks interesting.
