The Motley Fool

2 ‘hidden’ growth stocks that look set to break out

At first glance, gaming company Jackpotjoy (LSE: JPJ) seems to be a great growth investment. For the three months ending 30 June 2017, the company’s reported revenue grew by 17%, and adjusted EBITDA increased by 28%. Adjusted net income rose 14%.

However, the company has one thing holding it back: debt

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Growing out of debt

Jackpotjoy is highly leveraged. At the end of the first half, the company reported an adjusted net leverage ratio, including earn-out liabilities, of 3.6 times. Gross debt including earn-outs was £415m, compared to total shareholder equity of £237m and tangible assets of only £64m.

Such a high level of gearing may put most investors off the company, but management is working hard to change the group’s financial situation. 

During the second quarter the company generated 30p per share of operating cash flow and for the first half, operating cash flow was a total of £46m. Jackpotjoy has virtually no capital spending requirements, so all of this cash flow was devoted to debt pay-down. 

Gross debt has fallen by £100m since the end of 2016 and going forward it looks as if this pace of debt reduction is sustainable with a free cash flow around £50m per half (based on current figures, excluding any growth). With this being the case, the company should be debt-free within four years, and this will almost certainly result in a re-rating of the shares. 

The shares currently trade at a forward P/E of 7.9, a depressed valuation that reflects market sentiment towards the company’s elevated debt levels. Debt reduction should drive the valuation up to the sector average, which implies an upside of more than 100% of current levels as the gaming sector currently trades at a median P/E of 15.

Cash cow

As the company reduces debt, Jackpotjoy looks set to break out and so does the Phoenix Group (LSE: PHNX).

Phoenix is a consolidator of closed life assurance funds particularly, closed life and pension funds, which it acquires and then manages. Earnings from this business are unpredictable, and the company has reported a loss in two out of the past six years. 

Nonetheless, City analysts expect the firm to return to profit this year and have pencilled in a pre-tax profit of £189m for this year, followed by a profit of £209m for 2018. The company returns most of its income to shareholders with a dividend payout of 50.2p per share pencilled in for this year, equal to a yield of 6.5% at current prices. If the company can sustain its profitability, then the shares looks set to break out as investors re-rate the business as an income play. The company has always returned the majority of its earnings to investors, but unstable profits have recently overshadowed its income potential.

What’s more, between 2017 and 2018, management is looking to generate between £1bn and £1.2bn, and by 2020 cash generation of £2.8bn is targeted. For some comparison, the company’s current market capitalisation is £3.1bn.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves has no position in any of the 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

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.