Why I’d buy this FTSE 100 growth and income stock for my ISA today

Here’s a FTSE 100 (INDEXFTSE: UKX) growth stock I’d buy today, and a FTSE 250 (INDEXFTSE: MCX) one I’d keep away from for now.

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Long-term growth stocks can seem forever overvalued. But when they go through an almost inevitable slow spell, it can be a good time to get in.

FTSE 250 firm Renishaw (LSE: RSW), which specialises in precision measuring equipment, is in such a slow spell now. The shares soared to around £58 in January 2019, then reached a similar level again six months later.

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But then the rot set in, and despite a positive start to 2020, Renishaw shares are still more than 25% down on their previous peak. There are signs of at least some share price stabilisation, which suggests we might be seeing a buying opportunity.

But the problem is, earnings are falling as demand for the firm’s products has been slipping. Earnings per share fell 30% in the 2018–19 year, and there’s a similar drop expected for 2019–20.

First half

First-half figures Thursday emphasised the fall in demand from Asia Pacific countries, with revenue down 20%. But revenue slipped worldwide too, down 14% overall to £259.4m at constant exchange rates.

The bottom line shows a big dip in adjusted pre-tax profit, to £14.3m from £59.6m at the same stage in 2018. Adjusted EPS also fell, from 69.3p to 15.1p. But the interim dividend was maintained at 14p per share, with cash of £71.3m on the books.

I see Renishaw as a leader in its field, making high-quality products with strong margins. It wins on cash flow for me too, and I do think the current downturn is transitory.

But right now, on a forward price-to-earnings ratio of over 50 and with earnings that I think might come in well below forecasts, it’s too rich. I think there could be significantly better, and safer, buying opportunities in the future.

Growth return

After a couple of years of falls, analysts are expecting earnings at 3i Group (LSE: III) to return to growth. That’s not until 2021, mind, and they have the year to March 2020 flat.

Dividends have held up and look set to yield around 3.5%, covered more than three times by earnings. We’re looking at a P/E of under nine, and dropping. So why is the FTSE 100 growth prospect so apparently undervalued?

Well, 3i is a private equity and venture capital firm, and P/E is not as meaningful a measure for such an operator. It’s perhaps more helpful to look at net asset value, which stood at 877p per share at 30 September. That’s despite a hit from the strengthening of sterling, making the company look more attractive to me.

Attractive

With the shares trading at 1,110p, it indicates a price to book value of 1.27, which I don’t see as stretching.

During the third quarter, 3i’s private equity arm generated cash proceeds of £189m through several divestments. It also “signed the disposal of Aspen Pumps at an overall money multiple of 4.1x and a 34% IRR.

The company also spoke of “the highly accretive sale of Wireless Infrastructure Group out of 3i Infrastructure plc and further rail investment in North America.”

3i is, admittedly, a trickier company than many to value. And profits could be more erratic due to the long-term timing of investments and disposals. But I’m seeing a significant long-term growth opportunity, and a cash cow on the dividend front.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Renishaw. 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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