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One turnaround bargain and one growth monster I’d consider buying today

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Congratulations if you hold shares in Intertek Group (LSE: ITRK) as they are up 5.3% at time of time of writing, on publication of its 2017 four-year results.

Inter action

This was a highly positive set of figures that leaves the stock trading 36% higher than a year ago. The inspection, product testing and certification company’s revenues grew 7.9% at actual exchange rates, although just 3% at constant currency. Adjusted operating margin hit a record 16.9%, with 14.2% growth in adjusted operating profit to £468m (10% at constant FX).

Net profit after tax rose 12.8% to £306m, free cash flow climbed up 7.4% to £342m, while investors will be delighted by a 14.3% increase in the full year dividend per share to 71.3p. Management is now looking to increase its dividend payout ratio to around 50% from this year. Currently, it yields just 1.6%, covered 2.6 times.

Tek stock

Trading in its resources division was “challenging”, but this was expected. Its products and trade-related divisions represent a massive 94% of company earnings and they delivered an “excellent” performance. CEO Andre Lacroix hailed the group’s highly cash generative business model, strong financial position and attractive long-term growth prospects.

The obvious downside is the valuation, now a pricey forecast 24.8 times earnings. However, it stood at 23.3 when I looked at the stock last year, and that did not stop me from recommending it (glad I did). Forecast earnings per share (EPS) of 2% in 2018 and 8% in 2019 are reasonably promising. Intertek still looks good to go.

Aggreko aggro 

By contrast, stock markets gave a thumbs down to Aggreko (LSE: AGK), which published its 2017 results today. The rental power, temperature control and compressed air systems provider has has been hit hard by the downturn in the oil and gas sector, its share price is now down 32% over one year, and 58% over five. Today has clearly done nothing to change investor sentiment.

The headline on today’s report was “Results in line with expectations” but the market’s negative response flatly contradicts that. Investors clearly expected better.

Yet is it so bad? Aggreko has returned to earnings growth, with revenue up 4% to £1.73bn, excluding the impact of currency and pass-through fuel. Operating profit did fall 10% although it rose 13% if you exclude the impact of legacy contacts in Argentina, with revenue up 9%.

Profit before tax and exceptional items of £195m was in line with expectations, yet still down almost 12% from 2016’s £221m. Aggreko also lifted operating cash inflows from £338m to £450m, as its working capital initiative begins to deliver results. The financial position of the group remains solid, with net debt-to-EBITDA of 1.2 times, the same as in 2016. 

Long and short of it

This stock’s entry valuation looks more attractive than Intertek, with Aggreko trading at just 13 times forward earnings. It also offers a forecast yield of 3.8%, covered twice. EPS are forecast to rise 2% in 2018 and 8% in 2019. The market response looks a little harsh to me.

However, as Edward Sheldon recently reported on this site, Aggreko has been under attack from short sellers, and could remain vulnerable. Are you feeling contrarian?

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Intertek. 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.