Finding stocks with the potential to deliver market-beating growth over long periods isn’t easy.
But gems like these are worth hunting out, as they can help to transform your portfolio into a serious winner. Today I’m looking at two stocks which could fit the bill.
Sales at “instant service equipment group” Photo-Me International (LSE: PHTM) rose by 10.5% to £122.2m during the six months to 31 October.
This company is best known for providing automated photo kiosks for passport photos and picture printing, but it is also expanding into the self-service laundry business. Such facilities are far more popular and widespread in continental Europe than they are in the UK.
Profits from these three lines of business helped lift the group’s pre-tax profits by 6.1% to £32.9m during the first half. Earnings rose by 9.6% to 6.4p per share for the period. Most of the growth came from laundry, where sales rose by 75% during the period.
Although the rate of profit growth may not seem all that impressive, it’s worth remembering that Photo-Me’s earnings per share have risen by an average of 19% per year since 2012. The group’s dividend has risen by an average of 23% per year over the same period.
The group ended the first half with net cash of £47.1m, maintaining an unbroken record of net cash stretching back to at least 2012. Despite spending £68.6m on dividends and growth investments over the last year, net cash has only fallen by £21m during that time.
Quality worth paying for
In my view, this FTSE 250 company’s high profit margins and strong cash generation are worth paying for. Although the group’s shares trade on a 2017/18 forecast of 19, they still offer an attractive prospective yield of 4.5%.
I believe this stock continues to deserve a buy rating. It’s certainly a share I’d consider owning.
This firm is cleaning up
Biffa (LSE: BIFF) describes itself as an integrated waste management company. Collecting and handling a wide range of waste helped it generate revenue of £481.6m during the first half of the group’s financial year. That’s a 7.8% increase on the same period last year.
Underlying operating profits from the business rose by 9.3% to £43.4m over the same period. Yet although these figures seem strong, shares in the firm have actually fallen slightly since these results were published.
One reason for this might be that the group’s debt levels are now quite high, in my view. Biffa reported net debt of £272.2m at the end of the first half. Although this was broadly unchanged from the same time last year, it represents a multiple of 1.9 times times the group’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA).
However, much of the firm’s debt has been accumulated through a series of acquisitions. Excluding these, the firm’s cash flow does appear strong enough to support its dividend, interest and lease payments.
Waste management is a sector where there are still a number of smaller firms which might be suitable for consolidation. As one of the larger players in this area, Biffa could grow steadily by acting as a consolidator.
Given this, I think that the group’s forecast P/E of 13 and 2.9% yield could be a good starting point for a long-term position.
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Roland Head has no position in any of the 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.