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Why I’d consider this surprising growth stock before Purplebricks Group

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WH Smith (LSE: SMWH), the high street and airport convenience, books, news and stationery retailer, has been a surprising growth story over recent years. The travel-focused business division emerged as a growth area at a time when retail newsagents were in decline and embattled from fighting against the onslaught of digital media.

A strong growth trend

The shares are 300% higher than they were eight years ago, and today’s half-year results for the period to 28 February show the continuation of the operational trend. Total revenue from the travel-focused division rose 7% compared to a year ago with like-for-like revenue rising 3%. Meanwhile, the high street division saw a decline in revenue of 5% with like-for-like sales sinking 4%. Travel trading profit moved up 5% and high street profits slipped 6%.

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Chief executive Stephen Clarke said that the travel division is the largest part of the company in terms of both sales and profit. Growth in the division looks set to continue and the firm saw a record period for tender wins internationally.” Some 26 new units have been won since the start of the year, which includes eight units in Madrid Airport and seven in Rio de Janeiro, South America. The firm now has a presence in 48 airports across 27 countries.

The directors expressed their satisfaction with the results and their confidence in the outlook by pushing up the interim dividend by 10%. I reckon WH Smith demonstrates that you don’t need to back high-risk profitless firms aiming to disrupt old industries in order to find decent growth on the stock market. Sometimes, companies can do well with a reinvigorated approach to old industries. I’d consider holding stock in WH Smith before jumping on the seat-of-your-pants white-knuckle ride offered by, for example, Purplebricks Group (LSE: PURP).

Full of potential

But there’s no denying Purplebricks’ ongoing potential. In March the firm announced that Axel Springer, Europe’s leading digital publisher, has agreed to invest £125m in it by pruchasing new ordinary shares. The deal aims to accelerate the rollout in America, support its entry into other new markets, fund technological innovation, and expand the firm’s service offering. Axel Springer has experience in the estate agency business and operates “leading European real estate portals,” such as SeLoger, Immowelt and Immoweb. The deal will leave Axel Springer with around 11.5% of Purplebricks share capital.

Full-year revenues for the trading year to April 2018 are about 100% up on the year before, but Purplebricks has yet to turn a profit. The March update reminded us that the estate agency business has a high degree of cyclicality, reporting underlying softness in the UK market exacerbated by bad weather during February and March. As a consequence, revenues for the year look like missing expectations by around 5%.

The breakneck pace of expansion continues, and shareholders will be hoping that earnings will materialise before the next industry turndown arrives. City analysts following the firm are predicting first positive earnings per share during the year to April 2020. Between now and then, the share price could go anywhere, so I’m watching with interest.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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