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2 surprising growth stocks trading at bargain valuations

While a number of companies in a wide range of sectors are obvious growth plays, some stocks elsewhere offer surprisingly strong growth potential. In some cases, this can be shadowed by an underperforming division, or by a previous strategy which did not work as planned. For long-term investors, such companies can be worthwhile buys due to their wide margins of safety. With that in mind, here are two companies which could be worth a closer look right now.

Changing business

Reporting on Friday was healthcare company Smith & Nephew (LSE: SN). Its sales growth in the first quarter of the year was somewhat lacklustre. It increased by 3% on an underlying basis and was flat when the effects of currency translation and asset disposals were included. Beneath this disappointing headline result, however, was a potential catalyst which could push the company’s share price higher.

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In recent years, Smith & Nephew has focused to a greater extent on emerging markets. This seems to have been a smart move judging by its performance there in the first quarter of the year. Growth in its Emerging Markets operation was 12% on an underlying basis. This suggests exposure to fast-growing regions where there is a rising and ageing population could spark high earnings growth in the long run.

While Smith & Nephew currently trades on a price-to-earnings (P/E) ratio of 19.8, it has a stable track record of growth. It has delivered rising earnings in four of the last five years. When this stability is combined with its growth potential from emerging markets, it suggests that improved capital gains could be on the horizon. With efficiencies also improving thanks to a new strategy, the company could be a strong performer in an uncertain period for the global economy.

Improving outlook

The 2017 financial year is not expected to have been particularly successful for medical equipment specialist Consort Medical (LSE: CSRT). In fact, its bottom line is forecast to have risen by just 1%, which suggests that its growth rate is running out of steam after four positive years of growth. During that time, the company’s earnings increased at an annualised rate of around 14%, which shows that its strategy was working well.

Looking ahead, the company’s financial performance is expected to improve. In the current financial year, Consort Medical is due to record a rise in earnings of 8%, followed by further growth of 11% next year. This puts it on a price-to-earnings growth (PEG) ratio of only 1.4, which suggests that the market has not yet fully priced-in the company’s upbeat outlook.

As well as impressive growth and value credentials, Consort Medical is also expected to deliver a dividend rise which beats inflation. Its shareholder payouts are forecast to rise by over 5% per annum during the next two years. With dividends covered almost three times by profit, its 2% yield could rise at a brisk pace.

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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. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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