IG Design (LSE: IGR) has been one of the most lucrative growth stocks for investors over the past five years.
Since April 2013, shares in the company have produced a total return of more than 800% excluding dividends. Including dividends, over the past five years, the stock has returned 60.4% per annum for investors.
Over the past 10 years, IG has added 26% per annum, enough to turn an initial investment of £1,000 into £11,500 or £100,000 into £1.2m. I believe that this performance is set to continue as the company builds on its past successes.
Indeed, City analysts have forecast earnings per share growth of 38% for 2018, followed by an increase of 9% for 2019. According to a trading update published by the company today, it looks as if IG is well on track to hit these targets.
Management notes current figures indicate trading for the fiscal year to 31 March will be in line with expectations thanks to a robust performance from all regions. What is even more impressive is the fact that the company expects to achieve this growth despite “record levels of capital expenditure invested” during the year. Capital spending, coupled with the acquisition of Biscay Greetings in Australia, should help the group continue to expand its global sales volumes across the world.
The update also states “net cash ended the year positive” after property sales, organic cash generation and capital spending. Even though the company expects to end the year with a clean balance sheet, average leverage during the year is projected to have been below 1.5 times earnings before interest tax depreciation and amortisation (down from 2.3 times last year).
So overall, IG’s business continues to grow rapidly, and management is complementing organic growth with acquisitions, funded by cash generated from operations. To me, this indicates that the company still has plenty of potential. With this being the case, the stock’s valuation of 21.5 times forward earnings does not look to be too demanding.
Just getting started
Another growth stock I like the look of is the Gym Group (LSE: GYM). This company is a trailblazer in the low-cost, pay-as-you-gym exercise market, which has been expanding rapidly over the past decade as consumers shift away from the tired contract-based gym business model.
Gyms require a lot of capital to start up, but then go on to generate steady returns for many years without needing any more significant spending. As a result, the Gym Group started life with losses and high costs but as its portfolio has grown, economies of scale have begun to work in its favour.
For example, as revenue has tripled over the past five years, the firm’s operating profit margin has increased to 11% from -0.5%.
Analysts expect this trend to continue. Earnings growth of 41% is slated for 2018, and an increase of 29% has been pencilled in for 2019. The 2019 target implies the shares are trading at a forward P/E of 20, which might seem expensive. But when you consider the fact that the group only has 128 gyms (year-end 2017) and just over 600,000 members, compared to the total UK fitness industry membership of 10m across 6,800 gyms, it quickly becomes apparent just how small the company still is and how much room it has left to grow.
Considering the above, in my opinion, the stock deserves a high earnings multiple.
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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.