Three of last year’s top growth stocks have issued trading updates today. Are they still hot buys, or is growth likely to slow this year?
Churchill China
Shares in crockery firm Churchill China (LSE: CHH) rose by as much as 13% on Friday morning. Churchill, which makes tableware for restaurants, said that trading during the second half of 2015 had been ahead of expectations.
The firm’s board is now confident that operating performance for last year will be ahead of market forecasts and “well ahead of 2014”.
The latest analyst forecasts for Churchill suggest earnings of 33.6p per share, 9% above 2014 results. Today’s announcement suggests to me that 2015 earnings are now likely to be 15% to 20% ahead of 2014. I’d guess that 35p to 36p per share is more realistic, putting Churchill stock on a forecast P/E of 23 after today’s gains.
That doesn’t seem cheap, but this is a well-run and growing company. Operating margins have risen from 5% in 2010 to 9.5% in 2014 and Churchill has delivered steady dividend growth. Most importantly, the group has proved its ability to thrive in the face of cheap Chinese competition.
In my view the shares remain a strong hold and a reasonable buy.
Paysafe Group
Paysafe Group (LSE: PAYS) gained more than 6% this morning. The group, which was formerly known as Optimal Payments, said that revenue and adjusted earnings for 2015 would be ahead of expectations.
Revenue for the full year is now expected to be around $600m, ahead of current forecasts of $585m. Adjusted earnings before interest, tax, depreciation and amortisation are expected to be $150m, of which $100m was generated during the second half of the year.
Paysafe’s earnings have been boosted by the acquisition of Skrill in 2015. The group’s shares now trade on 16 times 2016 forecast earnings, which doesn’t seem excessive if growth can be maintained.
However, Paysafe took on $548m of long-term debt and scrapped its dividend when it acquired Skrill. In my view, the valuation looks reasonably full. I wouldn’t rush to buy this stock at the moment.
Nichols
Soft drinks producer Nichols (LSE: NICL) said this morning that despite “challenging” UK market conditions it expects to deliver results in line with expectations for 2015.
The group’s performance has been helped by strong export sales, which rose by 1.5%, or £0.4m, to £24.4m. However, exports only account for around 25% of revenue and the group’s UK business saw sales fall by 0.3% to £84.9m.
Nichols is expected to report adjusted earnings of 60p per share this year, putting the stock on a forecast P/E of almost 24. A dividend yield of 1.7% also suggests that the valuation is now quite demanding.
Although earnings per share are expected to rise by 8% in 2016, Nichols’ lacklustre revenue growth concerns me. The group’s operating margin has risen from 17% to 24% since 2009 and the firm reconfirmed its strategy of pursuing “value over volume” in today’s announcement.
However, my view is that quite a lot of growth is already priced into the shares, which have risen by 188% over the last five years. I’d need to do more research into the outlook for sales growth before committing to a buy.
