The Motley Fool

Two secret, cheap growth stocks to watch in 2018 and beyond

Door and window components company Tyman (LSE: TYMN) showed investors today just how much it’s benefitting from the global economic recovery. 

According to the firm’s figures for 2017, pre-tax profit for the year increased by 17% to £35m and underlying profit rose 10% to £68m, thanks to a 14% increase in revenues to £523m, helped by contributions from acquired companies Bilco and Giess. Favourable exchange rates also contributed to rising profitability.

And following 2017’s strong performance, management is not slowing up. Today, Tyman announced one of its most significant acquisitions yet, a $101m deal to buy US window and door hardware firm Ashland Hardware. To help fund the deal, it’s issuing 17.8m shares.

Expanding overseas 

The buyout of Ashland should accelerate Tyman’s growth in the US considerably. Its US-based AmesburyTruth division, which Ashland will join, grew sales at 15% to £332.7m last year, and Ashland will add another $67m to this total. For 2017, the US-based business recorded revenues of $67m and adjusted earnings before interest, tax, depreciation, and amortisation of $11m. This deal should help accelerate growth in 2018, and it shows just how committed management is to growing the business over the long term. 

Tyman has a history of expanding revenues through acquisitions. This approach has helped the company grow earnings per share at a rate of 12% per annum over the past five years. Management is expecting “a further year of profitable growth in 2018,” and City analysts have pencilled in earnings per share growth of 8%, although this doesn’t include gains from the acquisition announced today.

With this being the case, I believe the company’s current valuation of 10.8 times forward earnings is way too cheap. If management can continue to grow earnings at a double-digit rate every year, then its multiple looks to undervalue Tyman’s future growth potential significantly. As well as the bargain basement valuation, the shares also support a dividend yield of 4%.

Too cheap to pass up? 

Tyman isn’t the only cheap growth star I’ve got my eye on today.

Plastic piping systems manufacturer Polypipe (LSE: PLP) has seen its earnings grow at a compound annual rate of 34% per annum over the past five years — a growth rate more suited to a tech company rather than dull pipe producing business. 

City analysts are expecting the firm to report earnings growth of 22% for 2017, followed by an increase of 8% in 2018. However, this doesn’t include the impact of any potential acquisitions that may be inked over the next nine months.

Despite the historical earnings growth Polypipe has been able to achieve, the shares look relatively cheap, trading at a forward earnings multiple of only 13.6 at the time of writing. For most construction businesses, this valuation might be considered appropriate. But considering Polypipe’s record of growing earnings, it seems too cheap to pass up. What’s more, as CEO Martin Payne commented at the end of November, “the group continues to deliver strong organic growth ahead of the overall UK construction market, demonstrating the resilience of its balanced exposure to the different sectors within that market.

Could this be a better buy? 

Both Polypipe and Tyman look undervalued, but neither seems to be as cheap as the growth champion that's revealed in this free report.

This well-known FTSE 250 growth stock could be on track to grow its market value from £1.3bn to £4bn over the coming years, suggesting a gain of up to 200% might be possible for investors, eclipsing the returns Polypipe and Tyman have been able to achieve. 

If you want to find out more, I highly recommend that you download this free, no-obligation report and take a look for yourself.

Rupert Hargreaves owns no share 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.