Today, I’m looking at two FTSE 250 growth stocks that I believe should deliver steady growth over the next five years. Both stocks have recently pulled back from record highs. In my view, this could be a buying opportunity.
A rollercoaster ride
The Merlin Entertainments (LSE: MERL) share price has fallen by more than 30% from its 2017 high of 537p. But the stock rose by 3% in early trade on Friday after the theme park operator said that trading this year had been in line with expectations, despite a poor Easter.
Although this is good news, the company is still in recovery mode after last year’s London terror attacks. Visitor numbers to key capital attractions such as Madame Tussauds and The London Dungeons are still said to be lower than last year.
Management is “confident of a recovery over time” and I’d share this view. However, it’s worth noting that “parents under 35 with kids aged around seven” were said to be the main group avoiding London last summer. If this trend continues this summer, it could slow Merlin’s recovery.
A return to growth?
Broker forecasts for 2018 suggest that after-tax profits will be flat this year at about £210m. This would leave Merlin’s adjusted earnings unchanged at 20.5p per share, with a dividend of about 7.5p.
These figures put the stock on a forecast P/E of 17 with a forward yield of 2.2%. This doesn’t seem cheap, but earnings are expected to rise by 11% in 2019. A recent refinancing also means that the group doesn’t have any debt repayments until 2020.
If cash generation returns to historic levels, the stock could become attractive to investors looking for reliable dividend growth. As things stand, I think it could be a profitable investment over the next five years.
A global brand worth buying
Sales at fashion lifestyle retail group Ted Baker (LSE: TED) rose by 11.4% to £591.7m last year, while pre-tax profit rose by 12.3% to £68.8m. These figures suggest to me that the group’s global expansion remains on track and that it’s not having to cut prices in order to boost sales.
Despite this, the shares have fallen by more than 15% from its March high of over £32. In my view, this could be a buying opportunity, given the group’s strong financial record.
A very profitable business
Ted Baker has a number of the characteristics I look for in a high quality business. It has stable and attractive profit margins — operating margin has been stable at about 12% for a number of years.
Investment in the business generates attractive returns. The group gave a return on capital employed of 26% last year, a figure that’s consistent with previous years.
Finally, the company’s profits are fairly ‘clean’. Management doesn’t use large adjustments to boost headline earnings and net debt is kept quite low.
A buy and hold stock
These advantages combine to provide protection for shareholders if trading does go downhill. They also mean that if growth continues, the benefits should flow through to earnings and dividend payments.
Analysts expect earnings to rise by about 10% this year, with a similar gain pencilled in for 2019/20. These forecasts put the stock on a forecast P/E of 18.7, with a prospective yield of 2.6%. Although this isn’t cheap, I believe this is a quality business that should reward long-term investors.
