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3 Growing FTSE 250 Shares For A Market Pullback

Things are looking bright. The ‘great recession’ is over. Some researchers think the economy will post a 2.9% rise during 2014. Confidence returns everywhere, with long-boarded-up retail units reopening, acquisitions and mergers everywhere you look, and the FTSE 250 index testing 17,000.

Feeling comfortable can be a dangerous place

Whenever the index touched 17,000 before, it bounced back, and that could happen again.  Anecdotal warnings, such as Pfizer‘s attempt to take over AstraZeneca, make me twitchy. Big corporate deals sometimes coincide with market tops.

Further down the stock-index food chain, shares crash daily on any missed financial targets, perhaps signalling fragility in the long bull run we’ve experienced. It won’t take much to incite another FTSE 250 plunge — how about out-and-out war in Ukraine, for example?

Feeling uncomfortable can present opportunity

If shares fall, where will I look for value? How about some of the most consistently growing and often priciest companies in the FTSE 250? Market weakness presents opportunities to pick up some of the best-performing companies at more reasonable valuations. Here are three FTSE 250 growers I’m watching closely:

BritvicSoft drinks

Britvic (LSE: BVIC) reckons it is one of the leading branded soft drinks businesses in Europe. The company sells its own brands, which include names like Robinsons, Tango, J2O, Fruit Shoot, Teisseire and MiWadi as well as PepsiCo brands such as Pepsi, 7UP and Mountain Dew Energy, which it produces in Britain and Ireland under an exclusive arrangement. 

The product is consumable with fantastic repeat-purchase credentials – enough to get the investment juices going when we think of all the steady cash flow produced:  

Year to September 2009 2010 2011 2012 2013
Revenue (£m) 979 1,139 1,290 1,256 1,322
Net cash from operations (£m) 131 125 125 132 142
Adjusted earnings per share 33.9p 36.5p 33.7p 27.2p 35.2p

Progress looks well rounded; revenue and cash flow supports rising profits. Interim results released on 21 May confirm steady progress with adjusted earnings up almost 17% and a 13% dividend uplift.

Last year, Britvic derived about 68% of its revenue from the UK, 20% from France, 11% from Ireland and the rest from its international division. At today’s 728p share price, the forward P/E rating is running around 15, with city analysts expecting earnings to grow by about 14% in 2015.

Consumables

PZ Cussons (LSE: PZC) puts consumable goods into the personal care, home care, beauty, food and nutrition markets. Brits will be familiar with brands such as Carex, Original Source, Imperial Leather, Morning Fresh and Zip, although, last year, the firm earned 35% of its operating profit from Africa and 17% from Asia, as well as 48% from Europe.

Progress is steady:

Year to May 2009 2010 2011 2012 2013
Revenue (£m) 782 772 821 859 883
Net cash from operations (£m) 129 139 90 36 103
Adjusted earnings per share 12.39p 14.89p 16.2p 14.74p 16.62p

At today’s share price around 359p, the forward P/E is sitting at about 17, with forecasters expecting 10% earnings’ growth year ending May 2016.

Funeral-related services

Operating funeral services has always been a nice little earner. Not all tears shed at the time of a funeral relate to bereavement. Sometimes the sound of a clattering letterbox is enough to set us off when the postie delivers.

Dignity (LSE: DTY) operates as something of a consolidator of the undertaker industry, with a vibrant acquisition programme that seems to deliver great financial results:

Year to December 2009 2010 2011 2012 2013
Revenue (£m) 185 199 210 230 257
Net cash from operations (£m) 37 40 38 50 55
Adjusted earnings per share 40.5p 46.4p 55.1p 62.8p 72.1p

It’s hard to imagine demand for Dignity’s services dying off. In fact, with an aging population in Britain, the requirement for funeral services seems set to increase. I suppose fashion could evolve such that a utilitarian approach to dispatch becomes popular, without pomp and circumstance. However, nothing like that seems visible on the horizon just now, so Dignity’s business looks secure.

Forecasters expect the firm’s earnings to increase by 12% during 2015 and, at a share price of 1339p, the forward P/E is running at almost 15.

What now

With any general market weakness, I'll be checking out the valuations of these three growers. But I'm also keen on a share idea for capital gains from one of the Motley Fool's top small-cap investors. His diligent research has uncovered what looks like one of the best growth shares for 2014.

Sometimes growth comes from within when a company reinvents itself and pursues a different line of operations. When that happens, valuations can remain modest, as investors are slow to catch on to the new growth potential. That's what seems to have happened with this gem. A strong recovery in profits followed restructuring and the directors predict double-digit margins driving a profits surge in the years to come.

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The Motley Fool has recommended shares in Britvic.