The last year has been a rather disappointing one for investors in heat treatment services specialist Bodycote (LSE: BOY). That’s because its shares have fallen by 15%, which puts them 6% behind the performance of the FTSE 100. Looking ahead, there could be more underperformance ahead, with Bodycote’s valuation still indicating that it’s up with events despite its recent pullback.
For example, Bodycote trades on a price-to-earnings (P/E) ratio of 16.2 and yet is forecast to record a fall in earnings of 6% in the current year. Certainly, the company is expected to return to growth next year, but growth of 7% is roughly in line with that of the wider index and may not tempt investors to buy a slice of the business. In fact, Bodycote’s price-to-earnings-growth (PEG) ratio of 2.3 is rather high and doesn’t indicate that growth is on offer at a reasonable price.
In addition, Bodycote’s yield of 2.6% is also far less than the FTSE 100’s yield of just under 4%. As such, there seem to be better options available elsewhere.
Unlike Bodycote, estate agency Purplebricks (LSE: PURP) has soared in value in recent months, with its shares rising by 62% since the turn of the year.
Clearly, Purplebricks is a relatively young business and it has the potential to grow at a rapid rate. Moreover, it’s proving to be somewhat disruptive within the estate agency space, with Purplebricks having a different pricing model than most traditional estate agencies and this has so far been somewhat popular among house sellers. And with it expected to move from loss to profit over the next year, it would be unsurprising for Purplebricks’ share price to move higher in the coming weeks and months.
However, from an investment perspective it’s difficult to overcome Purplebricks’ high valuation. It trades on a forward P/E ratio of 47 and even though it has potential to become a highly profitable business in the long run, it may be wise to await a keener valuation before buying it.
Margin of safety
Meanwhile, engineering support services company Babcock (LSE: BAB) has outperformed the FTSE 100 by 5% in the last year and this could be set to continue. That’s because it offers good growth prospects at a fair price and while it’s due to change its CEO later in the year, it seems to have a wide margin of safety at the present time.
For example, Babcock is forecast to grow its earnings by 9% in each of the next two years and yet has a P/E ratio of just 12. This equates to a PEG ratio of only 1.3, which indicates that its shares offer significant upside potential. Allied to this is a yield of 2.9% and with dividends being covered 2.9 times by profit, there seems to be tremendous scope for a rapidly rising dividend. With demand for income stocks set to remain high, Babcock could see investor sentiment improve and therefore its shares look set to continue beating the wider index.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Bodycote. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.