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Is Creston plc A Better Buy Than WPP PLC and Pearson plc?

Small-cap marketing group Creston (LSE: CRE) has delivered a 32% return for shareholders over the last year, with the shares popping 14% higher in the last month alone.

This morning, the firm announced that its largest shareholder, asset manager DBAY Advisors, has increased its shareholding from 19% to 24%.

The move follows the recent publication of the firm’s full-year results. Although revenue only rose by 3% to £76.9m, diluted earnings per share rose by 11% to 13.1p, and the dividend rose by 8% to 4.2p.

These results have left Creston looking pretty cheap, in my view, with a trailing P/E of 10.5 and a yield of 3.0%, despite a strong outlook.

Looking at Creston’s figures has made me wonder whether this small, nimble firm could outperform FTSE 100 media stalwarts WPP (LSE: WPP) and Pearson (LSE: PSON) (NYSE: PSO.US).

A straight comparison

Let’s take a closer look at three key metrics which are likely to influence each of these companies’ share prices: earnings growth, valuation and yield.

Valuation

Company

2015/16 forecast P/E

Creston

10.2

WPP

15.4

Pearson

16.2

It’s often a good idea to demand a lower valuation when buying small cap stocks than their larger peers, as small companies tend to be more vulnerable to unexpected setbacks. Despite this, it’s fair to say that Creston looks significantly cheaper than WPP and Pearson on a P/E basis.

Earnings growth

Of course, being cheap is only attractive if earnings are expected to rise. Here are the latest forecast earnings per share (eps) growth figures for each firm:

Company

2015/16 forecast eps growth

Creston

9.4%

WPP

3.9%

Pearson

18%

Pearson is expected to report a sharp rise in earnings this year, thanks to more stable conditions and exchange rates in some of the firm’s key markets. The outlook also looks good at Creston, while WPP is expected to have a quiet year before earnings pick up again in 2016.

However, while Creston and WPP have both delivered annual average growth in reported earnings per share of close to 20% since 2009, Pearson’s reported earnings have fallen by an average of 6.8% per year during that time.

I’m more concerned about the long-term growth outlook for Pearson, whose main business is publishing, than for WPP and Creston.

Income

Dividends play a big role in investment returns, and all three of these companies have a strong record in this area:

Company

2015/16 prospective yield

5-yr. dividend growth rate

Creston

3.2%

7.0%

WPP

3.0%

16.5%

Pearson

4.2%

5.7%

WPP is the stand-out winner here, in my view, thanks to its above-average dividend growth rate. For long-term shareholders, faster dividend growth can often cancel out the effect of a higher initial yield over time.

Another consideration is that Pearson’s dividend is only expected to be covered by earnings 1.5 times this year, compared to 2.2 times for WPP and 3.1 times for Creston.

More conservative payout ratios often help to ensure that a firm’s dividend remains affordable over the longer term.

WPP vs Creston

In my view, the choice here is between WPP and Creston. As a long-term income stock I’d pick WPP, due to its greater size and diversity, but for a combination of growth and income, I’d choose Creston.

I believe Creston shares could deliver further gains over the next couple of years.

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Roland Head owns shares of WPP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.