2 undervalued mid-caps that could help you retire early

Specialist healthcare company BTG (LSE: BTG) issued a trading update ahead of its AGM today. The FTSE 250 firm said its strong performance in the year ended 31 March has continued into the new financial year.

It highlighted performance from its liver cancer treatment TheraSphere, and blood clot treatment device EKOS, and said that its antivenin CroFab has made a good start to the new snakebite season.

It advised that full-year guidance is unchanged. Chief executive Louise Makin commented: “We are on track to achieve double-digit product sales growth over the full financial year, driven by growth in our Interventional Medicine business.”

Near-term prospects

Given the in-line guidance, it’s no surprise BTG’s shares have barely moved on the day. Nevertheless, I believe the current price of 670p undervalues the business’s growth prospects, both in the near term and the longer term.

The forecast earnings consensus is 29.5p a share for the current year, 27.7% ahead of last year. This puts BTG on a price-to-earnings (P/E) ratio of 22.7 and a price-to-earnings growth (PEG) ratio of 0.8. The P/E is not excessive, while the PEG being below one indicates the stock is undervalued for the earnings it’s forecast to deliver. Near term, a 20% rise in the shares would take it closer to fair value

Long-term prospects

Looking beyond 2017/18, BTG appears well-placed to continue its strong growth. The company says it expects no let-up in double-digit product sales increases in the medium term.

This will be driven by a continuing strong performance from its interventional medicine business, aided by the anticipated opportunity from its varicose veins treatment Varithena, and its PneumRx Coil treatment for patients with severe emphysema, both of which are expected to reach important milestones this year.

In addition to fast-growing sales, the company expects to deliver an increasing gross margin, so profits should race higher at a great clip. With cash on the balance sheet (no debt) and fast-rising profits reinvested in the business (no dividend), I see BTG as a stock that could produce fantastic capital gains over the long term and I rate the shares a ‘buy’.

A different proposition

Aside from being in the FTSE 250, Caledonia Investments (LSE: CLDN) is a different proposition to BTG. For one thing, it’s an investment trust and for another, it targets both capital and income growth (it has delivered 50 consecutive years of dividend increases).

I believe this company’s shares are also undervalued (at 2,845p) and that its long-term prospects make this another stock that could help you retire early.

Hidden value

Caledonia holds many familiar stocks, such as Microsoft, Nestlé and British American Tobacco but it also has 30% of its portfolio in private companies, such as Gala Bingo and The Sloane Club, and a further 12% in private equity funds.

Caledonia’s last reported net asset value (NAV) per share was 3,403p at 30 June, so its shares are currently trading at a discount to NAV of 16.4%. This is attractive in its own right but the potential NAV is even higher, due to the private companies on the books. For example, Caledonia recently sold caravan park operator Park Holidays UK for net proceeds of £197m — a 47% premium to its carrying value of £134m.

Due to the discount to NAV and the potential additional ‘hidden value’ that could be realised over time, I rate Caledonia’s shares a ‘buy’.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended BTG. 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.