A capital gain of 50% within the next two years may sound like an ambitious target. After all, the FTSE 100 is already close to its all-time high and it could be argued there are fewer value opportunities on offer. Furthermore, the global economic outlook remains uncertain, which means growth rates could disappoint. However, one stock reporting today has a bright future, a very reasonable valuation and could rise as much as 50% by 2019.
The company in question is Smart Metering Systems (LSE: SMS). It installs, owns and manages utility metering assets, and recorded a rise in the total number of assets under management of 28% in the 2016 financial year. This helped to push its total annualised recurring income 20% higher, while the company also signed contracts for the installation and ownership of gas and electricity domestic smart meters with eight energy suppliers.
As a result of its positive performance, it expects 2016’s financial numbers to be in line with expectations. There’s further growth potential from its relatively new status as a fully integrated service provider. This should help to increase its appeal to customers. Its delivery of year-on-year double-digit growth across all of its key metrics provides evidence of its sound strategy and growth plan.
In 2017, Smart Metering Systems is forecast to record a rise in its bottom line of 18%, followed by further growth of 54% in 2018. Although it currently trades on a price-to-earnings (P/E) ratio of 28.8, its exceptionally strong earnings forecasts seem to justify a relatively high rating. For example, if it maintains its current rating at the end of this year, its shares will be 18% higher than they are today. Furthermore, it would trade on a price-to-earnings growth (PEG) ratio of just 0.5, which would indicate more capital gains could lie ahead.
Looking beyond 2018, it seems likely that the company will be able to continue to post double-digit earnings growth. After all, in the last four years it has done so in every year. Therefore, it would be unsurprising for it to maintain its current rating at the end of 2018, which could lead to gains well in excess of 50% by 2019.
A challenging sector
Such a bright future contrasts with many of its support services peers, such as facilities management company Mitie (LSE: MTO), which are enduring difficult periods. In Mitie’s case, its new management team has a major turnaround job ahead, with recent profit warnings and the decision to exit from the healthcare business likely to cause a degree of uncertainty in the short run.
Mitie is expected to record a fall in its bottom line of 47% in the current financial year. However, it would be unsurprising for this figure to be downgraded. Part of the difficulty it faces is a potential slowdown in the UK at a time when it’s reorganising its business. Therefore, Smart Metering Systems seems to be a far more attractive purchase at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Smart Metering Systems. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.