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1 FTSE 100 growth stock I’d buy and 1 I’d avoid

Professional information and analytics company RELX Group (LSE: REL) has announced yet another quarter of steady revenue growth, again demonstrating its ability to consistently deliver for shareholders.

In its latest trading update, the FTSE 100 firm said it is confident of delivering another year of underlying revenue, profit, and earnings growth as it enters the fourth quarter of its financial year. Key business trends remained positive as underlying revenues increased by 4% in the first nine months of 2017, with all four of its business units showing continuing good growth.

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Digital shift

RELX has worked hard to make the shift from traditional print publishing towards online subscriber-based information and data services, and the fruits of its efforts are now paying off. Digital revenues now account for nearly 75% of revenues, up from 50% in 2008.

As more and more companies embrace digital transformation to remain competitive in today’s market, data is seen as a key differentiator. And it’s here that the company’s rich datasets give it a unique competitive advantage to develop new products and innovate as it meets the growing demands of its customers.

It’s no surprise then that RELX’s Risk & Business Analytics division is its biggest contributor of growth, with underlying revenue growth of 8%. Fundamental drivers for the unit are compelling, with demand for more sophisticated analytical services from corporate and government sectors underpinning future growth.

High expectations

RELX’s strong track record has earned it a higher stock market rating, as the group’s price-to-earnings ratio has risen from 14.5 times in 2012, to 23.8 times now. As such, investors are justified in expecting near-perfect execution from its organic development and the integration of recent acquisitions.

Still, further upside could yet be to come for its shares as the company looks set to return more cash to shareholders. With a cash flow conversion ratio consistently above 90%, RELX generates strong (and growing) cash flows, which have historically been far in excess of its capex and M&A requirements. Therefore, as its current £700m share buyback comes to an end, I reckon an even bigger buyback could be on its way.

Margins

Meanwhile, I’m less optimistic about resurgent supermarket chain Morrisons (LSE: MRW).

According to research from Kantar Worldpanel, like-for-like sales in the 12 weeks to the second week of October rose by 2.8%, making Morrisons was the fastest growing of the UK’s big four grocers, but I expect the continued weakness in margins will hold back further upside in its shares.

The expansion of the German discounters, Aldi and Lidl, in the UK grocery market and the ensuing price war have changed the sector’s landscape forever. As such, I think it’s unlikely that the margins of the big four supermarket chains could realistically return to historical levels anytime soon.

At 22 times forward earnings this year, shares in Morrisons seem too highly rated for a company which is still undergoing a tentative recovery. What’s more, they also trade at a premium to its rivals, Tesco and Sainsbury’s, which are valued at 18 and 12 times forward earnings, respectively.

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Jack Tang 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.

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