I reckon this UK growth stock is 38% undervalued and going to rally

Oliver Rodzianko believes Breedon Group could be an excellent growth stock to add to his portfolio. Here are the risks and rewards he’s noticed.

| More on:
A pastel colored growing graph with rising rocket.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I think this growth stock could be a very stable addition to my portfolio. With all of the hype around the technology sector at the moment, sometimes it’s nice to get some breathing room. I believe Breedon Group (LSE:BREE) provides a decent way to park some cash in a growing and healthy British construction business.

Company overview

The firm is a leading construction materials company in the UK and Ireland. It provides a range of products and services to the building industry, with core operations in quarrying, production, and sale of aggregates, ready-mixed concrete, asphalt, and cement. It also offers surfacing and contracting services.

Breedon has more than 100 quarries, over 50 asphalt plants, 170+ ready-mixed concrete plants, and two cement plants. It also employs 3,700 people, and management has a focus on generating high levels of profitability.

Long-term growth

Breedon has pulled off significantly strong financial results for over a decade, and my research on the company convinces me this is likely to continue.


In £ – Net Income, Yellow – Revenue, Blue – Net Margin, Green – Source: TradingView

With its balance sheet having more equity than liabilities, that means the firm isn’t over-leveraged, and its growth in the future shouldn’t be overly inhibited by debt repayments.

Also, this investment has a healthy 3% dividend yield right now. And while the share price is down roughly 35% from its high after the pandemic struck, I think this could be the best time for me to buy in.

Exceptional value

I think Breedon Group offers wonderful value for the price it is presently selling at. On the surface, its price-to-earnings ratio is just 12 right now, which is appealing to me.

But also, on a deeper look, I consider the company 38% undervalued based on my discounted cash flow analysis. This takes into account future predicted earnings for the firm and discounts it back to what I estimate as today’s value for the stock.

Over the past 10 years, Breedon Group has maintained 22.5% earnings growth as an annual average. For my calculation, I only need the firm to hit 11% as an annual average for the next decade. I consider that a relatively safe bet.

Investment risks

Now, although I have a favourable view of the organisation’s future earnings potential, I have been made aware of a risk to its profitability.

The firm’s gross and operating margins have been in decline for more than five years. This could in turn have a negative effect on the earnings of the business. Therefore, I know I need to continue to carefully evaluate the firm’s profitability potential on a regular basis if I become a shareholder.

Also, with all of the firm’s revenues coming from the UK and Ireland, there’s some risk that if these countries face an economic downturn, Breedon Group could be severely affected. Compared to other construction companies that are diversified around the world, this is a significant weakness.

I might buy it soon

I am actively looking for great investments outside of the technology sector at the moment. Breedon Group certainly seems like a stable and prosperous choice for me to consider.

This business is high up on my watchlist. I think it’s likely I’ll buy a stake in the group when I next make some investments in March.

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.

Oliver Rodzianko 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.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

Investing freedom — but inside a pension

Strapped consumers might be cutting back on investing, but they’re still keeping up their pension contributions. The only problem? A…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Forget gold! I’d rather buy these 3 FTSE high-yielders in a Stocks and Shares ISA

Gold looks like a risky investment to me as the price hits an all-time high. I'm ignoring the fuss to…

Read more »

Young female business analyst looking at a graph chart while working from home
Growth Shares

This 55p UK stock could rise more than 300%, according to a City broker

This UK stock has fallen from above 800p to below 60p. But analysts at Citi believe it’s capable of a…

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

I think this FTSE 250 trust has all the right ingredients to lock in long-term profits

Today I'm examining the prospects of a private equity investment trust on the FTSE 250 that caught my attention recently…

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

2 under-the-radar UK shares investors should consider snapping up

Two UK shares have caught the eye of our writer. She explains why investors should be taking a closer look…

Read more »

Investing Articles

Are these 2 ultra-high-yielding income stocks a good buy for me?

These two income stocks often split the debate amongst investors. So what does our writer think of them as potential…

Read more »

Senior woman potting plant in garden at home
Investing Articles

5% yield! This dividend stock could be great for my retirement

Our writer explains why this dividend stock appeals to her as she’s investing to build wealth to enjoy in the…

Read more »

A young Asian woman holding up her index finger
Investing Articles

I’d aim for a second income of £1,000 a month with this super-reliable dividend stock

I think a great way to build a second income stream is by investing in dividend stocks via a Stocks…

Read more »