Today, I’m taking a look at two mid-cap stocks and offering some ideas for why growth and income hunters should check them out.
Weighty retail presence
First off, it’s payment services company PayPoint (LSE: PAY). With over 29,000 PayPoint terminals operating in the UK, the company has a weighty retail presence in an industry where scale is paramount.
Clients, ranging from utility and media companies to government organisations, prefer to use a single payments solution, and so too do customers, for ease of use and convenience. Moreover, the very high fixed costs required to set up a competing network throw up barriers to entry, which gives Paypoint a serious competitive advantage and in turn allows it to dominate the market.
But while the fixed costs of setting up a payments system are indeed high, variable costs of processing transactions are low, which makes incremental revenue highly profitable. The problem though is that consumers are gradually moving away from cash payments and increasingly use mobile and online payments. These are fast growing markets, but unfortunately, PayPoint has so far struggled to make any significant headway.
Still, the move towards a cashless future will be a very slow process, and cash remains the dominant payment method, accounting for nearly half of all customer transactions in the UK. Moreover, PayPoint continues to see strong growth from its retail service offering, where transactions increased by 17.8% last year, and there’s further scope for expanding its retail network in Romania.
PayPoint offers great value for money too. Analysts expect earnings to grow by 8% this year, which puts the stock on a forward P/E of 15.7. And if we strip out the £81m in net cash on its balance sheet, its forward P/E would drop to just 13.8. What’s more, the shares trade at yield of 4.3%.
Also offering great value for money is Provident Financial (LSE: PFG). Shares in the sub-prime lender are 11% lower than at the start of the year, but fundamentals remain broadly positive.
The sub-prime lending market may be a risky sector, but because the market is under-tapped, Provident benefits from limited competition and favourable growth prospects. Growth in earnings per share over the past five years has consistently been above 10%, and just last year Provident saw its pre-tax profits grow by 22%.
Looking forward, more growth could be yet to come. City analysts expect earnings to expand by 13% this year, and a further increase of 7% is pencilled-in for 2017. These estimates would put the stock on forward P/Es of 17.5 and 15.9, respectively. It’s therefore unsurprising that city analysts are bullish on the stock. Out of 13 recommendations, eight are strong buys, five are holds, with none recommending a sell.
Provident currently trades at a reasonable yield of 4%, but what’s most tempting about the stock is its dividend growth potential. Thanks to its strong capital position and a favourable outlook on earnings growth, its prospective yields for 2016 and 2017 are 4.3% and 4.7%, respectively.
Neil Woodford is a big fan of the stock too. Provident is the fifth biggest position in his CF Woodford Equity Income Fund, accounting for just over 4.5% of its portfolio value.
A better stock?
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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of PayPoint. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.