At a time when most markets are sitting at new highs, it’s more important than ever for growth investors to check they are buying companies fully capable of justifying their high valuations.
With this in mind, here are two stocks that I believe are worth shelling out for.
Strong sales growth
Today’s set of interim numbers from FTSE 250 engineer Spirax-Sarco (LSE: SPX) goes some way to explaining just why its share price has climbed 28% in the last year.
Over the first half of 2017, revenue at the £4.1bn cap climbed 25% (or 13% when currency fluctuations are taken into account) to £429m. According to the company, 5% of the sales growth was organic, with both its Steam Specialities business and the Spirax-owned pump manufacturer Watson-Marlow performing well. Importantly, this rate of growth was ahead of that achieved by global industrial production in general. Adjusted operating profit rose to £101m — a 31% increase (or 13% in constant currency).
Rising over 2% in early trading, shares in Spirax currently change hands for 27 times forecast earnings. That might seem seriously expensive, but I think this valuation can be justified by the company’s market leading positions, geographically diversified operations and the consistently high returns on capital achieved over the years. Spirax’s balance sheet is rock solid and boasts a serious amount of cash.
Furthermore, the recent acquisitions of Gestra (a global leader in valve and control systems for heat and fluid control) and Chromolax (which supplies electric heat and control products) will be earnings accretive in 2017, suggesting that full-year figures are likely to be even more positive than those announced this morning.
Shares in global professional services provider and new FTSE 250 entrant FDM Holdings (LSE: FDM) have also been in fine form, rising 23% over the last month alone following June’s cracking set of interim figures.
In the first half of 2017, revenue climbed 35% to just over £117m with pre-tax profit hitting £20.6m — up 33% on the same period in 2016. Cash flow generated from operations rose 27% to £20m.
The company’s IT and business consultants (or Mounties) have been in huge demand of late thanks to general concerns over cyber security and new EU data protection rules that come into force next May. Any businesses found to not be complying with these regulations faces being hit with severe financial penalties.
FDM’s presence across the world continues to grow, with “excellent performances” being witnessed in its North American and Asian Pacific markets (revenues rising 56% and 137% respectively). Revenue from Europe, the Middle East and Africa also climbed 12% from the previous period. Collectively, FDM’s overseas revenue now accounts for half of all that generated by the company’s IT consultants, suggesting that its shares should be fairly immune to any Brexit-induced volatility as the March 2019 deadline draws closer. The business welcomed 35 new clients over the interim period and continues to diversify across sectors, with 71% coming from outside financial services.
Like Spirax, buying a slice of FDM doesn’t come cheap. At 33 times earnings, the latter will need to continue performing seriously well to justify its steep valuation. With its board now anticipating that full-year figures will be “comfortably ahead of its previous expectations,” and there doesn’t seem much doubt about this. The recent 29% hike to the interim dividend is another sign of just how confident management appears to be on the company’s future prospects.
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Paul Summers 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.