2 growth stocks I’d consider buying today

Cosmetics firm Warpaint London (LSE: W7L) released a trading update this morning ahead of its AGM. Despite saying it continues to trade in line with expectations, the shares are currently 11% down at 215p, valuing the business at £139m.

The company listed on AIM as recently as November last year but is an established, profitable and highly cash generative business. I think the shares got a ahead of themselves when they reached over 300p last month — from an IPO price of 97p — but are now looking a more attractive proposition.

Excellent value for money

Warpaint’s flagship W7 brand, which offers quality at affordable prices and focuses on the 16-30 age range, has grown organically every year since its inception in 2002. The range is sold into high street retailers and independent beauty shops across the UK, Europe, Australia and the US.

In today’s update, the company said it had seen double-digit sales growth in the US and encouraging growth elsewhere, with the exception of Europe where sales were flat. It added that its e-commerce strategy is on track and is becoming a growing contributor.

The company is forecast to post revenue of £32m this year, followed by more than £38m next year, with net profit increasing 27% from £6m to £7.6m. This gives a price-to-earnings growth (PEG) ratio of just 0.7, which indicates excellent value for money.

This is an easy-to-understand business, the cosmetics market tends to be resilient through economic cycles (the so-called ‘lipstick effect’) and the founder directors are industry veterans who retain a significant stake in the company. These positives and the attractive valuation make this a growth stock I’d consider buying at the current price.

Major acquisition

Also releasing news this morning was AIM-listed firm Michelmersh Brick (LSE: MBH). Its shares are currently trading 11% higher at 80p, valuing the business at £65m.

The company announced it has acquired Carlton Main Brickworks Limited for a net consideration of just over £31m. So this is a major acquisition given Michelmersh’s market cap. The deal is being financed through new loan facilities, existing cash resources and the issue of shares, which will dilute existing shareholders by less than 6%.

It looks a good acquisition, adding significant scale, broadening Michelmersh’s markets and providing cross sales opportunities and product synergies. More immediately, it’s also “expected to be significantly earnings enhancing in the current financial year.”

Galvanising growth

Ahead of today’s news, Michelmersh was forecast to deliver a pre-tax profit of £4.4m for 2017, while Carlton arrives having done £2.6m in its last financial year. Of course, Michelmersh will now have borrowing costs (it was previously debt-free) but management said the increased operational cash flow of the group will assist in servicing and repaying the debt, as well as supporting further investment and dividends.

I estimate Michelmersh is trading on a mid-teens P/E but with the Carlton acquisition set to galvanise earnings growth, this is another stock I’d consider buying today.

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G A Chester 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.