There are not many companies out there that have produced a return of nearly 300% for investors over the past five years. Many of those that have are now trading at rich valuation multiples, which look pricey compared to the growth these companies are expected to generate.
However, Wincanton (LSE: WIN) and Photo-Me (LSE: PHTM) are two companies that don’t fit this mould. Over the past five years, shares in these businesses have returned 250% and 270% respectively, excluding dividends. Including dividends, returns are closer to 300% and what’s more, it looks as if this growth is set to continue.
Room for further growth
Both Wincanton and Photo-Me have been written-off by investors in the past, yet both have gone on to defy expectations.
For example, Wincanton plunged into a loss for 2012 and the firm’s weak balance sheet led to many investors writing-off the business. Five years on and things could not be more different. If the company hits City earnings targets for this year, earnings per share will have doubled from 13.3p for 2013 to 26.6p for the fiscal year ending 31 March 2017. At the same time, net debt has fallen from £131m to £32m. Net gearing has come down to 13%.
Despite these improvements, shares in Wincanton are still cheap. The shares are trading at a forward P/E of 10.2 falling to 9.8 for 2018. Meanwhile, the business is valued at an enterprise value-to-earnings before interest, tax, depreciation and amortisation multiple of 3.7 compared to the industry average of 8.3.
As Wincanton moves from its recovery to growth phase, the market should continue to re-rate the shares and take advantage of the low earnings multiple.
There’s no other way of putting it, Photo-Me is a cash cow. The firm has used its dominant position in the world of fixed high-margin photo booths to expand into new markets including washing machines and car washes with reasonably attractive returns.
Earnings per share have risen from 4p in 2012 to 9.2p for the year ending 30 April 2017. Over the same period, the company is on track to have paid out 26.5p per share in dividends to investors, around 65% of total earnings per share since 2012. As well as Photo-Me’s cash returns, the firm has amassed a cash pile of £77.2m, almost twice annual net profit.
Shares in Photo-Me are currently trading at a forward P/E of 18, which may seem expensive, but for the past five years, the company has achieved an average return on capital of around 25%. For some comparison, last year tech giant Apple produced a return on capital of 24%.
City analysts expect Photo-Me’s earnings per share to grow by a steady high single-digit percentage for the next three years. And assuming the shares continue to trade at today’s multiple, this indicates a capital gain in the region of 5% to 10% per annum.
Add-in Photo-Me’s dividend yield of 4.2%, and the shares look to be an extremely attractive investment indeed.
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Rupert Hargreaves 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.