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2 stocks with 25% immediate upside potential

Soft drinks supplier Britvic (LSE: BVIC) and energy procurement consultant Inspired Energy (LSE: INSE) delivered positive trading updates this week. 

Based on such good trading, I reckon there’s around 25% immediate upside potential in each share price to get the valuations to a ‘fair’ level. 

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What they said

On Tuesday, commenting on a first quarter that saw FTSE 250 constituent Britvic deliver 4.3% revenue growth and a 3.9% uplift in volume year-on-year, chief executive Simon Litherland seemed happy. He said: “All our key markets have delivered revenue growth…we are confident that the strong execution of our marketing and innovation plans combined with disciplined revenue management and our cost saving initiatives will deliver full-year results in line with market expectations.”

Meanwhile, AIM-listed Inspired Energy delivered an end-of-year trading update Monday trumpeting a 40% revenue gain, a 45% surge in earnings before interest, tax, depreciation and amortisation (EBITDA), and an order book that has swollen by 14% during 2016.

The firm has grown both organically and by acquisition and chief executive, Janet Thornton said: “Inspired had a very strong 2016 in which the business delivered on its stated growth strategy…  We continue to seek out attractive acquisitions and I am confident that 2017 will be another year of positive growth.”

Valuations 

At a share price of around 632p, Britvic’s forward price-to-earnings (P/E) rating runs around 12.5 for the year to September 2018 and there’s a forward dividend yield of 4.1% or so. City analysts following the firm expect earnings per share (EPS) to lift by 5% during 2018.

With its share price of 13.25p, Inspired Energy’s P/E rating sits at just over 10 for 2017 and the dividend yield is projected to be 3.8% that year. Growth looks strong with analysts anticipating a surge in EPS of 19% during 2017.

Given the defensive nature of Britvic’s business, I’d expect the firm to trade on a much higher rating. Comparing to other soft drinks suppliers, such as Nichols with its P/E rating around 23 and AG Barr at 17 or so, it seems clear that investors expect less growth from Britvic. However, I reckon the company could surprise to the upside on growth over the next few years and a valuation re-rating upwards could materialise for the stock.

Meanwhile, Inspired Energy’s valuation seems conservative given the growth figures the firm keeps posting.

What’s a normal valuation?

In my view, the market is being unfairly cautious on these two firms because both are trading well with apparently good prospects for further growth down the line. 

The median forecast P/E rating of all stocks with forward estimates for earnings runs around 14 on the London stock market. Re-rating to that level would see Inspired Energy put on more than 25% and if Britvic re-rated to match its peer AG Barr, the shares would rise by more than 25%. 

If good trading continues and earnings keep increasing, we could easily see share price gains from here, and there’s the comfort of a decent dividend in each case while we wait.

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Kevin Godbold owns shares in Britvic and Inspired Energy. The Motley Fool UK owns shares of and has recommended Britvic. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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