Why I’d buy Rolls-Royce Holding plc and this growth stock in November

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Shares in the Grafton Group (LSE: GFTU) are sliding today after the company reported a strong performance for the three months ended 31 October 2017. 

The international merchanting and DIY group reported revenue growth of 9.1% for the 10 months to 31 October. The increase in constant currency terms was 6.9% as the overseas business outperformed domestic ops. Management blamed this on the market environment noting “pricing remains competitive going into the year-end” as demand “softened” in October. Meanwhile, the outlook for the group’s Irish business is only improving as construction is recovering from “a low base,” and it will “require several years for supply to meet ongoing demand.

For the rest of the year, Grafton’s management believes, “current trading conditions in the UK merchanting business are likely to continue.” 

However, according to Gavin Slark, Chief Executive Officer, as the UK arm struggles, “the Irish and Netherlands businesses should benefit from favourable trading conditions and strong market positions.

Undervalued growth

So overall, it looks as if the Grafton group will continue to grow steadily in the years ahead, extending its run since 2012. Since year-end 2012 to year-end 2016, earnings per share have surged 216% as pre-tax profit has jumped 356%. For the next two years, City analysts are forecasting earnings growth of 9% per annum as growth in the Irish business offsets sluggish growth elsewhere. 

Based on Grafton’s historical growth, and the company’s future potential, its valuation of 15.9 times forward earnings looks highly attractive to me. The shares also offer a dividend yield of 1.8%, which is covered 3.5 times by forward earnings, giving plenty of room for future rises. 

Hidden growth stock

If Grafton is not for you, Rolls-Royce (LSE: RR) might be a better buy. Rolls-Royce has struggled over the past few years, but the company now looks to be getting back on track to growth. 

Today the group provided a trading update on its performance during the third quarter. Reaffirming comments made at the time of the half-year figures, and Chief Executive Warren East said: “We have made steady progress in the second half of the year. In Civil Aerospace, we continue to achieve our key targets for customer deliveries while managing in-service issues. Defence Aerospace and Power Systems are also performing satisfactorily, although Marine continues to be impacted by weak demand for products and services for the off-shore oil and gas market. Overall, while we have a good deal left to do in the last two months of the year, our performance for 2017, for revenue, profit and free cash, remains on track.

For the full year, analysts are expecting the company to report earnings per share of 35.5p, up 18% year-on-year. Next year, earnings are expected to expand 11% to 39.4p. Based on these numbers, the shares are trading at a forward P/E of 28.5, which might seem expensive but based on the firm’s double-digit earnings per share growth, and an order book of £83bn (nearly six years of revenues) this valuation appears appropriate

That being said, the company’s dividend yield of 1.3% leaves much to be desired, although it’s more than most high-street bank’ offer on savings accounts today. 

Looking for bigger dividends 

Rolls-Royce and Grafton look like great growth stocks but the their dividend yields are far below the market average. 

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Rupert Hargreaves owns no share 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.