Many investors may be surprised to find out that there are still a number of shares trading at large discounts to their intrinsic values. That’s despite the FTSE 100 having reached a record high this year, which has pushed many stocks to higher valuations than they have achieved in recent years. However, that doesn’t mean all companies are overpriced. In fact, here are two stocks which appear to be cheap based on their future prospects. But does that mean they are worth buying today?
Reporting on Monday was service-led niche pharmaceutical developer, Quantum Pharma (LSE: QP). The company announced the disposal of Total Medication Management Services, which is a homecare dispensary and delivery business which trades as Biodose Services. The disposal is another significant step in the transition of the business as it seeks to focus on its core Specials and Niche Pharmaceuticals divisions. The initial cash consideration on disposal will be £1.75m, with a maximum additional contingent consideration of £0.2m.
The sale of the division improves Quantum Pharma’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin by eliminating low-margin turnover. In addition, the company’s remaining divisions have traded ahead of expectations in the early months of the year. The company expects this to offset the majority of the disposed contribution from Biodose Services in the current year.
Looking ahead, Quantum Pharma is expected to report a rise in its bottom line of 31% in the next financial year. Even after today’s 3%+ rise in its share price, this leaves the business trading on a price-to-earnings growth (PEG) ratio of just 0.4. This suggests its capital growth potential is high, which means it may be worth buying for the long term.
Also offering a wide margin of safety at the present time is sector peer Vectura (LSE: VEC). The therapeutic products and drug delivery systems specialist has a strong track record of growth. For example, in the last three years it has been able to increase its bottom line at an annualised rate of around 70%. This shows that its strategy has been working well.
Its future growth rate is also highly impressive. The company is forecast to report a rise in its bottom line of 54% next year, which could help to improve investor sentiment after a share price decline of 25% in the last year. One consequence of a disappointing year for its share price is that Vectura now trades on a PEG ratio of 0.3. This indicates that it could offer significant capital growth potential, with a margin of safety present in case there are downgrades to its forecasts.
Clearly, Vectura is a small company which may offer relatively high risks. However, with a substantial discount to its intrinsic valuation it could prove to be a sound long-term buy for less risk-averse investors.
Peter Stephens owns shares of Vectura Group. 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.