Over the past five years, shares in home services company Homeserve (LSE: HSV) have trounced the broader market. Since the end of 2012, the shares have produced a total capital return of 250% excluding dividends. Including dividends, the total return is close to 300%, approximately 60% per year.
And I believe that this performance is set to continue. For the year ending 31 March 2018, City analysts are expecting the company to announce earnings per share growth of 16% followed by an increase of 11% for the following period.
However, I believe that these forecasts are out of data as today, the firm announced a game-changing acquisition.
Boost to growth
Homeserve is buying the trade and assets of the home assistance cover business of Dominion Products and Services, Inc, a wholly owned subsidiary of utility company Dominion Energy. This transaction brings a growing customer base of 0.5m customers and 1.1m policies and will provide HomeServe with access to 7.1m additional households. The deal is expected to be immediately accretive to adjusted earnings per share.
The merger is going to take place in two parts. Tranche one will bring 4.3m households on board, while Tranche two will deliver the final 2.8m households. When complete, the merger is expected to add £17m of profit before tax and amortisation. The upfront cost is $143m which includes $20m of deferred consideration payable on a straight line annual basis over 10 years. To fund the deal, the firm is reaching out to shareholders for £125m via way of a placing.
As well as the announcement of this acquisition, Homeserve also revealed today that for the six months to 30 September, group revenue rose 17% to £366m, 12% on a constant currency basis, and group adjusted operating profit was up 13% on the prior year at £35m.
Overall, it looks as if Homeserve is now on track to beat City earnings forecasts for its fiscal year, and this is excellent news for shareholders.
Even though the shares currently trade at a premium forward P/E of 26.7, I believe that this valuation is justifiable considering the company’s growth rate.
Growth at a reasonable price
Performance marketing provider XLMedia (LSE: XLM) is another business that I believe could make investors enormously wealthy. Year-to-date, shares in XLMedia have returned 73% for investors as the company has turned from a depressed dog into a shooting star.
This time last year, City analysts were downbeat about the company’s prospects. Today, analysts are projecting a 15% rise in earnings per share for 2017, followed by growth of 7% for 2018.
Once again, I wouldn’t be surprised if the company beats these forecasts. At the beginning of July, management announced that for the first half, the firm was performing ahead of expectations as three acquisitions that completed during the period, in cybersecurity, credit comparison, and mobile marketing, all contributed to growth. Not only have these businesses provided growth, but they’ve also added diversification to the group.
As well as the attractive growth outlook, shares in Homeserve support an appealing dividend yield of 3.4%. The payout is covered twice by earnings per share. All in all, this looks to me to be a good growth and income buy.
