Investors normally try to pigeonhole shares depending on their major attributes. For example, a stock may have a high yield or strong growth prospects. Therefore, it’s either an income share or a growth stock. Similarly, a company’s share price may be cheap given its outlook, in which case it may be labelled a value stock. However, in reality a number of companies have many reasons to buy or sell them. One company reporting today may offer a fast-growing dividend as well as vast share price appreciation potential.
Transport operator FirstGroup (LSE: FGP) may not operate in the most exciting of sectors. However, the 12.6% rise in its reported revenue in the third quarter of the year shows it offers strong growth potential. This was aided by positive currency translation, but even on an underlying basis the company’s performance was upbeat.
For example, its US operations continue to perform well. The First Student and First Transit divisions of the company recorded rises in revenue of 0.5% and 4% respectively. They benefitted from an improving macroeconomic outlook, while an ongoing pricing strategy in First Student and the commencement of new business in First Transit also boosted their performance.
However, the UK economy continues to hold back the company’s overall progress. Its First Bus and First Rail revenues decreased by 1.1% and rose by 0.8% respectively on a like-for-like basis. However, with cost efficiencies yet to come through, their performance is likely to improve over the medium term.
Looking ahead, FirstGroup is forecast to record a rise in its earnings of 16% this year, followed by growth of 15% next year. Despite this strong outlook, it trades on a price-to-earnings (P/E) ratio of just 9.2. This indicates that there’s scope for a 30% gain in its share price between now and the end of 2018. If this happened, it would trade on a P/E ratio of just 10.4. This would still represent good value for money given that FirstGroup is expected to report a rise in its earnings of 8% in 2019.
The company’s outlook is superior to that of sector peer Go-Ahead (LSE: GOG). It’s expected to record a fall in its bottom line of 1% this year, followed by growth of just 2% next year. Although Go-Ahead has a highly enticing P/E ratio of 10.5, that’s still higher than its sector peer’s rating. Therefore, there seems to be considerably greater upside potential for FirstGroup’s investors over the medium term.
Certainly, Go-Ahead’s yield of 4.5% is higher than FirstGroup’s 2.9%. However, the latter may have better dividend growth potential than the former. That’s not only due to its superior earnings growth prospects, but also because of a payout ratio of 23% versus 47% for Go-Ahead. Therefore, FirstGroup seems to offer better value, superior growth and greater income potential over the long run than its industry rival. As such, it appears to be a strong buy with the potential to record over 30% capital growth by the end of 2018, while also enjoying a fast-growing dividend yield.
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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.