With global economic growth showing clear signs of slowing, finding growth stocks have become increasingly difficult. Corporate earnings growth is beginning to moderate and, in many cases, earnings have already started to decline. And as expectations of future earnings shrink, so too do their valuations and share prices.
However, not all companies are affected in the same way with slowing global growth, and here are three stocks that should continue to do well:
Unilever
Recent earnings figures show that Unilever (LSE: ULVR) is not immune to changing global economic conditions. Volume growth, particularly for food and homecare markets, has already begun to decelerate in early 2015. And to make matters worse, falling emerging market exchange rates further adds to the headwinds on revenue growth.
But in spite of this, earnings growth remains resilient for Unilever. Underlying EPS grew 14% in 2015, and analysts expect it will grow by a further 4% this year. This is because management is doing well at what it can control, and that is cutting costs, building brand value and staying innovative. This helps it to deliver organic revenue growth and bolster its margins.
Unilever’s stock is trading somewhat lower than its historical average, with a forward P/E of 20.1 and prospective dividend yield of 3.3%. Although that still puts the stock at a significant premium to the market today, Unilever has demonstrated that it has been adept at generating consistent earnings growth over many decades. So it would seem quality is worth a premium.
ARM
Despite fears of a slowdown in smartphone and tablet markets, microchip designer ARM Holdings (LSE: ARM) continues to enjoy robust top-line growth. In the first nine months of 2015, revenue grew 16% year-on-year. For the full year, analysts expect revenue growth will top 21% in 2015, with 15% pencilled in for this year.
The company is investing heavily on future growth – with estimates of R&D spending in excess of £200 million each year going forward. That’s around 14% of revenues, which is significantly more than many mature players in the semiconductor industry.
Spending more money on R&D makes plenty of sense, as it helps to boost margins. Operating profit margins have already risen by some 20 percentage points from six years ago, and now stand at 51.7%. This is because as ARM develops ever more powerful compact processing chips, the company has got an increasing slice of the revenue earned from each device. And this has helped earnings to grow much faster than revenues.
ARM is trading at 2016 forward P/E of 32.6, which is substantially more expensive than what most stocks are currently worth. But, at least, ARM is trading below its five-year historical P/E of around 50x.
WPP
Advertising and public relations agency WPP (LSE: WPP) may not be widely considered as a growth stock, but it nonetheless has some solid growth prospects. The company has an impressive client base and an equally impressive management in place. This is demonstrated by its track record over the past five years, where underlying EPS has grown by a compound annual growth rate (CAGR) of 13.8%.
Looking forward, the Rio 2016 Olympics would create favourable tailwinds for the company, as advertisers look set to take advantage of the quadrennial event to boost their marketing spend. Its stock is fairly valued on its earnings growth prospects, with a 2016 forward P/E ratio of 14.7 and a prospective dividend yield of 3.3%.
