After October’s market sell-off, the FTSE 100 remains in the doldrums. It’s over 10% below its summer high. My colleague Royston Wild yesterday wrote an article about how City analysts’ earnings forecasts for 2019 are falling fast. However, not all stocks have suffered downgrades. Indeed, some have seen upward revisions. TT Electronics (LSE: TTG), which released a trading update today, and XP Power (LSE: XPP), are cases in point.
While it would be foolish to attempt to call the short-term direction of the FTSE 100, I believe these two companies are well-positioned to deliver higher returns than London’s flagship index in 2019 and beyond.
Things in common
The two companies have a number of things in common. They’re both in the FTSE SmallCap index, but are far from being minnows. TT Electronics has a market capitalisation of £346m at a share price of 212p, and XP Power is valued at £477m at a price of 2,480p.
They’re also both in the Electronic & Electrical Equipment sector. TT designs and manufactures things such as sensors and connectivity devices for performance-critical applications. XP designs and manufactures power controllers, which convert power from the electricity grid into the right form for equipment to function. Both have diverse end markets, including medical and various industrial segments.
Good geographical diversification is something else they have in common. TT generates over 70% of its revenues from outside the UK, and XP over 80%.
Time for TT
Turning to valuation, both businesses have strong earnings and dividend growth outlooks. And I reckon their shares are currently undervalued.
TT said in today’s trading update: “Following a first half with good revenue growth and significant margin improvement, momentum has strengthened into the second half of the year.” This should put the company on track to meet (if not beat) City analysts’ earnings forecasts for the year. The resulting price-to-earnings (P/E) ratio of 14.4 isn’t screamingly cheap. However, the full benefits of two acquisitions made during 2018 will kick-in in the coming year bringing the P/E down to 11.7.
With acquisitions having expanded TT’s addressable market, and management also investing in areas that will support the future growth of the business (including an exciting joint venture opportunity, announced today), I believe the company has good prospects of delivering above-average returns for investors well beyond 2019.
XP powers on
XP’s latest trading update was similarly bright, with the company saying it believes it’s continuing to grow market share, as its products are increasingly designed-in to new equipment by its target customers. Like TT, two recent acquisitions help underpin earnings growth forecasts. In XP’s case, a current-year P/E of 14.1 falls to 13 for 2019.
This is another company where I see good prospects for investors beyond 2019. Again, it has a larger addressable market after recent acquisitions. XP also has significant design wins under its belt that will “translate into orders as our customers’ projects move to production phase over the coming years.”
Finally, TT and XP both pay dividends that are well-covered by earnings. And with good earnings growth prospects, their dividends are expected to increase strongly, too. TT offers a current-year yield of 3%, rising to 3.4% for 2019, while XP offers 3.3%, rising to 3.5%. The sparky dividends add to what I see as strong candidates for big capital gains. As such, I’d be happy to buy both stocks today.
