Investing in companies with a track record of beating the market can be a good way to boost your own investing profits. Quality companies, with a history of generating strong returns, can sometimes continue to outperform for many years.
The two companies I’m going to look at in this article have both thrashed the wider market over the last couple of years, delivering share price gains of 70% and 40%. Both have issued trading statements today that suggest to me that their recent performance could continue.
Ahead of expectations
Full-year profits from funeral service provider Dignity (LSE: DTY) are expected to be “slightly ahead of current market expectations”. The group’s underlying operating profit for the third quarter was £1.8m higher than the same period last year.
The group — which operates nearly 800 funeral parlours and 39 crematoria in the UK — said that the improved performance was the result of a higher number of deaths than expected during the second and third quarters. The group has also acquired a total of 13 funeral locations so far this year, giving a further boost to top-line figures.
Current forecasts suggest that Dignity will report adjusted earnings of 112.1p per share this year, putting the stock on a forecast P/E of 23.7. Earnings growth of 11% is forecast for next year, implying a 2017 P/E of 21. However, the forecast yield is a miserly 1%, limiting Dignity’s attraction to income investors.
Buy or sell?
Dignity is a very profitable business. The group reported an operating margin of 31% last year and has doubled its dividend since 2010. One of the financial benefits of this business is that customers are unlikely to shop around for the best price when they need to arrange a funeral. Some investors may find this off-putting, but in financial terms it’s very rewarding.
However, in my view, Dignity’s net debt of £490m is somewhat high when compared to last year’s net profit of £56.9m. Although cash flow is strong and reliable, I’d like to see lower debt and a higher yield.
After climbing 70% over the last two years, I think Dignity shares are fully priced for the time being.
A very profitable deal?
Exhibition and trade publishing firm Informa (LSE: INF) has just completed the £1.2bn acquisition of Penton, a US rival. This deal is expected to increase earnings per share by 70% this year, and puts Informa shares on a forecast P/E of 16.
Today’s nine-month update suggests that everything is going according to plan. Informa says that a growing focus on trade exhibitions and subscription data services is helping to support growth. Meanwhile, income from operations in North America and Asia is offsetting Brexit-induced weakness in Europe.
Informa shares didn’t move after today’s update, which suggests to me that the market was comfortable with the firm’s comments. In my view, Informa shares could be an interesting medium-term buy.
Informa stock offers a forecast yield of 2.9% and a solid outlook for growth. Despite the shares having risen by 40% over the last two years, I believe there could be further upside for patient shareholders.
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Roland Head 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.