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2 growth stocks you and your kids will love

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The popularity and sheer ubiquity of Peppa Pig is such that this young American can recognise and name her and several of her anthropomorphic friends without ever having watched an episode of the programme. For the owner of the rights to Peppa Pig, Entertainment One (LSE: ETO), this level of popularity has unsurprisingly been a huge boon.

But while your kids or grandkids may love Peppa, should you be equally interested in shares of Entertainment One? On that front I have my doubts. Although Peppa has been great news for the company, helping more than double pre-tax profits over the past five years, the larger company has yet to prove itself as a great long-term investment.

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The issue is that Entertainment One has been pumping all of its growing pre-tax earnings back into acquisitions but none of them have so far turned out to be another Peppa Pig-style hit.

 

 

2012

2013

2014

2015

2016

Underlying EBITDA (£m)

52.6

62.5

92.8

107.3

129.1

Acquired content (£m)

64.4

101.6

199.4

166.3

121.4

Adjusted net debt (£m)

44.1

87.8

111.1

224.9

180.8

While investing in growing the business is a wise decision, especially since the shine will one day come off Peppa, management has so far proved unable to capture lightning in a bottle twice. While I applaud it for investing in growth rather than succumbing to investor pressure to return wads of cash to shareholders through dividends or share buybacks, management will need to one day provide investors with something to show for their investment.

But with the shares trading at 43 times trailing earnings and earnings per share (EPS) growing just 25% over the past five years despite the enormous popularity of Peppa, I’m not very confident that Entertainment One will ever prove a fantastic share to own.

No toying around here

Proving itself more successful in growing EPS has been Character Group (LSE: CCT), the toymaker that holds the rights to Peppa Pig, Teletubbies and Minecraft amongst others. For the year to September underlying EPS was up a whopping 22.7% year-on-year.

Statutory revenue and earnings growth was less impressive due to the weak pound, but over the long term this shouldn’t be as great a problem as international markets are an increasingly important part of the business. In the past year, foreign sales rose 50% and now account for 26% of revenue and this should continue to improve as Entertainment One pushes Peppa into new regions.

Character Group has also been taking a fairly conservative approach to business and has maintained a healthy balance sheet with £6.9m in net cash at year-end. This safe financial position has allowed dividends to grow 36.4% year-on-year so that the shares now yield a fairly solid 2.83%.

And with earnings still covering dividends three times over there’s plenty of room for further increases in the future. Shares of Character Group are also much more reasonably priced than Entertainment One at 11 times trailing earnings. While Character Group will also one day face the music if Peppa loses popularity, the company is fairly well diversified, has a solid history of increasing shareholder returns and a very sane valuation makes it a company I reckon both parents and kids will appreciate.

But is Character Group the best growth stock out there?

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Ian Pierce 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.

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