The Motley Fool

Is this small cap set to soar after profit beats expectations?

On The Beach Group (LSE: OTB) is up around 5% today at 220p, after releasing a trading update for its financial year ended 30 September. The UK’s leading online retailer for beach holidays has bucked the challenging backdrop that has hit many stocks in the travel sector.

The company said that it’s “traded well in a difficult market” and that it now expects pre-tax profit for the year to be “marginally ahead of the top end of market expectations”.

Growth opportunity

On The Beach puts its success down to “the strength and flexibility of our agile business model” in what chief executive Simon Cooper describes as “an extraordinary and unprecedented year for the travel industry”.

The company has shrugged off such things as the impact of terrorist attacks and the weakening of sterling since the EU referendum to deliver UK revenue growth of 12%. The company said its first international site, Sweden (launched in January 2015), is continuing to make progress in growing visitors and generating bookings and revenues, and that a second international site in Norway is set to launch in the next two months.

Amidst difficult trading conditions, the company has demonstrated its ability to increase its market share and improve its margins by what it describes as “a simple strategy of optimising our customer proposition to increase conversion”.

On The Beach looks set to grow both its top line and bottom line at a strong clip in the next few years. But how much do investors have to pay for this growth?

I reckon we could be looking at earnings per share (EPS) of about 12.8p when the company announces its full results, giving a price-to-earnings (P/E) ratio of 17 or so. That’s an undemanding rating for a growth stock, and with analysts have already pencilled-in earnings growth of 40% for next year, the P/E-to-earnings growth (PEG) ratio is a highly attractive 0.4. On this basis, I rate the stock a buy.

No rush to board

In contrast to On The Beach, budget airline easyJet (LSE: EZJ) is struggling in difficult market conditions that have been compounded by the Brexit vote. The FTSE 100 company has warned on profits and City earnings forecasts have nosedived.

Analysts are expecting EPS to plummet 22% when the company releases results for its financial year ended 30 September next month. And they’re forecasting a fall of a further 14% for 2017.

At a current price of 930p, easyJet’s shares are almost 50% down from their peak last year. Is all the bad news now in the price — which would make the shares a good buy at the current level — or could we be in for more bad news and a further decline in the shares?

easyJet’s chief executive Carolyn McCall said earlier this month that “history shows that at times like this the strongest airlines become stronger”. However, in addition to the prevailing tough trading conditions there is one thing that’s new to history: namely, whether or not UK airlines will retain access to the European Common Aviation Area after Brexit.

Uncertainty on this matter is likely to persist for some time, so I see no rush to invest in easyJet at this stage.

The best growth stock?

While easyJet's growth prospects have stalled for the time being and I believe On the Beach is a superior pick today, a stock in an altogether different sector has caught the eye of the Motley Fool's experts. They've published a compelling analysis of the company in question in a FREE without obligation report called A Top Growth Share From The Motley Fool.

This often-overlooked company has confounded investors for years by consistently exceeding the growth priced-into the shares. And our analysts reckon there are good reasons to be confident it will carry on doing so.

Simply CLICK HERE for your copy of this free report - but hurry, it's available for a limited time only!

G A Chester has no position in any shares mentioned. 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.