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Why IG Design Group plc is set to soar by 20%+ after today’s update

Gift packaging specialist IG Design (LSE: IGR) has released an encouraging update today. It shows that the business has performed relatively well over the important Christmas period and that it’s on track to meet expectations for the full year. Although its shares have risen by over 3% today, it faces an uncertain future as the UK retail sector could endure a challenging 2017. However, it has the scope to rise by over 20% over the medium term. Here’s why.

Improving performance

The third quarter saw a continuation of IG Design’s upbeat performance from the first half of the year. While today’s update doesn’t provide any figures on sales growth, it does state that results are in line with the upgraded expectations released in November. Furthermore, all of the company’s regions are trading profitably, which shows that its current strategy is working well.

In fact, the company is forecast to grow its bottom line by 28% in the current year. If this is achieved, it would mean that it has posted five successive years of profit growth, with earnings rising at an annualised rate of over 17% during the period. This shows that IG Design has the potential to perform well in a variety of market conditions, which should bode well given the uncertain outlook for the UK economy and retail sector.

A difficult year ahead?

A key reason why the UK economy and retail sector face a challenging future is Brexit. Already, it has caused a depreciation in the value of sterling which is likely to equate to a much higher rate of inflation over the course of 2017. This could mean a return to the negative real wage growth last seen in the aftermath of the credit crunch, with consumer spending likely to decline as shoppers tighten their belts. That’s particularly the case since unemployment could rise over the medium term.

As mentioned, IG Design appears to be well placed to overcome such challenges. This is evidenced by its past performance, but also by its wide margin of safety. For example, it trades on a price-to-earnings growth (PEG) ratio of only 1.4. This shows that even if its profit guidance is downgraded, it could still be a strong performer versus its sector peers. And its earnings growth indicates that a share price rise of over 20% is relatively likely.

An even better option?

Of course, sector peer Walker Greenbank (LSE: WGB) offers an even lower valuation. The interior furnishings company is forecast to grow its earnings by 26% in the next financial year, which puts it on a PEG ratio of only 0.5. And with it having recorded a rise in earnings in each of the last five years, it offers a relatively stable business model as well as a sound strategy. As such, while IG Design is a strong long-term buy, Walker Greenbank could outperform it while offering a lower risk profile from its wider margin of safety.

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Peter Stephens 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.