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Cosmetics group Warpaint London (LSE: W7L) is on the warpath. The company is trying to bulk up its presence within the make-up market through the acquisition of Retra Holdings, which will help it grow in the gift segment. 

Bolt-on growth 

Retra makes gift sets for high street retailers such as Boots, Superdrug and Asda, with three major brands Technic, Body Collection and Man’s Stuff. As we move into the time of year when shoppers are particularly interested in these sorts of products, the announcement of the acquisition seems to be well-timed. 

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To fund the deal, Warpaint is issuing £21.2m by way of a placing at 190p. Directors are contributing £670,000 of their cash to show their commitment to the deal and enlarged group. The cost of the acquisition itself is £18.2m. 

Retra made a profit of £2.3m on sales of £17.5m last year, so Warpaint is paying 1.04 times sales or 7.9 times profit. This might be a tad expensive for other buyers but considering Warpaint’s valuation of 5.1 times sales and price to earnings ratio of 17.8, it seems relatively low cost. The acquisition is expected to be immediately earnings enhancing. 

Fast, cheap growth 

Management’s decision to buy Retra makes a lot of sense. The business is growing rapidly with sales growth of 41.2% year-on-year reported for 2016. Operating profit for the period expanded by 204%. If the company can continue on this trajectory, a price of around one times sales might turn out to be a steal. 

Warpaint itself is also expanding rapidly. For the first half of 2017 revenue rose 4% overall but 19% in the US and 22% in the rest of the world excluding Europe and the UK. These latter two regions produced growth of less than 10%. 

Alongside its first-half numbers, Warpaint reported that it had received a record number of Christmas orders. Considering these figures, I believe that it could be on track to outperform City expectations for the rest of the year.  

Analysts are currently expecting the company to report earnings per share growth of 19% for 2017, rising to 28% for 2018. Based on these numbers the shares are trading at a 2018 P/E of 17.2 and PEG ratio of 0.6. The company also supports a dividend yield of 1.9%, and the payout is projected to expand 170% this year. 

Defensive income

PZ Cussons (LSE: PZC) is another company that I believe has enormous growth and income potential. 

PZ is a play on the growth of global consumer spending. Despite encountering headwinds over the past few years, over the long term, this global giant should produce enormous returns for investors as it has a history of steady growth and returning cash to investors.  

At the time of writing, its shares might not look cheap, trading at a forward P/E of 17.4, but this valuation is appropriate for a consumer goods business. Indeed, the industry median valuation is 18.1 times forward earnings, so it is trading at a discount to the rest of the industry. 

At the same time, it supports one of the highest dividend yields in this traditionally defensive sector. The shares yield 2.9% compared to the sector median of 2.5%. Considering these figures, it looks to me that if you’re looking for a defensive consumer goods buy, this could be the stock for you. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of PZ Cussons. 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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