Finding stocks which can be classed as ‘dirt cheap’ may be getting more difficult as the FTSE 100 trades above 7,000 points. However, this does not mean it is an impossible task. Companies with upbeat growth outlooks can command high valuations and still return 25% or move within the next two years. Here is an example of such a stock which could be worth buying following its recent results.
Reporting on Wednesday was construction industry supplier CRH (LSE: CRH). Its sales revenue increased by 15%, while profit before tax was up 69% on 2015’s figure. This provides evidence that its current strategy is working well, with margins and returns ahead in all of its divisions. Furthermore, cash generation has been strong and the company has been able to exceed its de-leveraging target and improve the quality of its balance sheet. Given the uncertain outlook for the UK and European construction market in particular, this could increase the attractiveness of the company’s shares.
CRH’s diversity continues to be a key asset for its investors. It has enjoyed positive momentum in the Americas and with eight acquisitions completed already in the current year, it is becoming increasingly diversified. This lowers its risk profile somewhat and with sterling continuing to depreciate, the company’s financial performance could benefit from a positive currency translation over the medium term.
Over the next two financial years, CRH is forecast to record a rise in its bottom line of 66%. Despite this, it trades on a price-to-earnings (P/E) ratio of just 22.1. This means that it has a price-to-earnings growth (PEG) ratio of just 0.8, which indicates that it has significant upside potential. In fact, its shares could easily move 25% higher and still have a relatively attractive PEG ratio. And since they trade at a discount to their historic average P/E ratio of 25.4, a higher valuation is rather easy to justify.
Of course, CRH is not the only construction company which could have a bright future. Sector peer Balfour Beatty (LSE: BBY) continues to mount a comeback after a challenging period. It is forecast to record a rise in its bottom line of 173% over the next two years. And since it trades on a PEG ratio of just 0.2, it appears to have greater upside potential than CRH between now and 2019.
However, Balfour Beatty also comes with greater risk. Its balance sheet is arguably less stable than that of its sector peer, while it has a less proven track record than CRH. It has been lossmaking in each of the last two years when compared to three years of double-digit profit growth for its industry peer.
Certainly, Balfour Beatty is in the midst of a transformation, but CRH appears to have a settled business model which is performing well. Therefore, while the two stocks appear to be worth buying, CRH seems to have the superior risk/reward ratio.
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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.