It’s surprising how many top growth stocks aren’t widely discussed among investors. Perhaps it’s because the activities of these firms are sometimes quite dull, despite their impressive profitability.
Today I’m going to look at two such stocks. In both cases, I believe further gains are possible for patient shareholders.
Safety + profits
FTSE 250 firm Halma (LSE: HLMA) makes a wide range of safety and protection-related technology. Examples include fire detection systems and electronic sensors used for environmental monitoring. In all, the group has about 50 businesses in more than 20 countries.
Sales rose by 15% to £506.3m during the six months to 30 September, lifting the group’s pre-tax profit for the period by 18% to £76.8m. Operating profit margin was in line with the same period last year, at about 16%.
Shareholders will be rewarded with a 7% hike to the interim dividend, which rises to 5.71p per share. But today’s figures, while strong, are no better than investors have come to expect. Profits have risen by around 8% each year since at least 2012.
The shares have risen by 220% over the last five years, as investors have backed Halma’s strategy of organic growth and acquisitions.
Are acquisitions getting too expensive?
The firm announced its latest acquisition last week. It will pay £62m plus additional performance-linked payments of up to £23m for Mini-Cam, a pipeline inspection company.
Mini-Cam generated an operating profit of £5.2m last year. Dividing this by the price paid gives an earnings yield of between 6.1% and 8.4%, depending on performance payments. This seems reasonable to me, so on this evidence I don’t think management is overpaying for growth.
A premium price tag
Strong and consistent returns have left Halma shares trading on a premium P/E of 30 times 2017/18 forecast earnings, with a dividend yield of just 1.1%.
That’s definitely not cheap, but I think the price is still fair, given the group’s track record of growth and strong cash generation. In my view, shareholders would be wise to sit tight.
No one enjoys paying top prices for a chocolate bar or magazine at the airport. But selling such items is a very profitable and fast-growing part of the business of high street stalwart WH Smith (LSE: SMWH).
Indeed, while profits from the group’s high street outlets were flat at £62m last year, profits from travel outlets rose by 10% to £96m. It’s clear that the travel business is key to the group’s growth.
This decline of the high street could be a problem. But I suspect WH Smith’s management will find a solution, perhaps by selling this side of the business or entering into a joint venture with a complementary retailer.
A positive outlook
This stock has a number of attractions for shareholders. The group has net cash on the balance sheet, an astonishing return on capital employed of 65% and a strong record of shareholder returns.
Earnings are expected to rise by 5% this year, and by about 8% in 2018/19. Dividend growth is expected to be similar. This gives the stock a forecast P/E of 18.5 for the current year, with a prospective yield of 2.5%.
These figures may not seem cheap, but as with Halma, I think shareholders may be rewarded by remaining patient.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma and WH Smith. 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.