After a hugely challenging period, the prospects for aerospace and defence company Rolls-Royce (LSE: RR) appear to be relatively bright. The outlook for the defence industry is continuing to improve and alongside improvements being made to its business model, this could lead to stronger financial performance in future.
However, it’s not the only stock which could offer high earnings growth over the medium term. Reporting on Thursday was another company that could be worth buying right now.
The company in question is provider of cloud-enabled end-user and network security solutions Sophos (LSE: SOPH). Its trading update showed that it continues to make progress with its strategy. Billings in the first nine months of the financial year increased by 21%. It was able to generate strong growth across all of its regions, with the Americas and EMEA rising by 22%. Its cash flow performance also improved, with net cash flow from operations up 21% versus the same period of the prior year.
Looking ahead, Sophos is expected to report a rise in its bottom line of 137% in the next financial year, followed by further growth of 77% in the 2020 financial year. Despite such a strong growth rate, it trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests that it could offer a wide margin of safety and that there could be significant upside potential on offer.
While there is scope for a downgrade to its outlook, demand for its products looks set to increase in future years. This tailwind could enable to it to provide improving financial performance over the long term.
Also beginning to enjoy a positive tailwind is Rolls-Royce. As mentioned, the defence sector has experienced a number of difficulties in recent years. Cost cuts across the developed world have meant that demand for military products has fallen, and this has caused a number of companies across the industry to report disappointing returns.
Now though, the company has a sound strategy under its current management team. Cost cuts could help to make it more efficient and are expected to contribute to a rise in earnings of 40% in the next financial year. With the company trading on a PEG ratio of just 0.5, it seems to offer excellent value for money. That’s particularly the case while the FTSE 100 trades within 6% of its all-time high.
Looking ahead, Rolls-Royce could also become a more enticing income stock. It is due to increase dividends per share by around 28% over the next two years. While this puts it on a forward dividend yield of just 1.9%, it is expected to pay out just 36% of profit as a dividend. This suggests that it could afford a much higher payout – especially when its bottom line is forecast to rise rapidly. As such, its total return potential seems high.
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Peter Stephens owns shares in Rolls-Royce. 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.