For investors just starting to buy individual stocks, it can be difficult to sort through the hundreds and thousands of potential investment options out there. For this reason, some investors like to work their way down from the FTSE 100 to smaller indices like the AIM 100. With that in mind, I think there are two standout stocks in the FTSE 100 that growth-oriented investors may find intriguing.
High test scores = high profits
The first is quality insurance test provider Intertek (LSE: ITRK). It carries out quality control tests on a range of consumer goods, industrial goods and raw materials. In recent years the group has pushed into the consumer goods space due to its increased margins, less cyclical nature and the huge addressable market that is growing rapidly as companies looking to trim costs and outsource this non-core task.
In 2017, strong growth from consumer goods more than overcame weakness in the resources division, which is itself due to the oil & gas market’s continued issues. It led organic revenue 2.1% higher year-on-year with overall constant currency sales up 3% to £2,769m. Considering revenue from the resources segment was down 8.6%, this overall performance was quite good.
Even more impressive are the results of management’s push into consumer goods and cost-cutting exercises that led operating margins up 1.1 percentage points to 16.9% during the year. With margins rising, management was able to increase full-year dividends by 14.3%, reduce its net debt-to-EBITDA ratio to 1 times, and also invest more cash in margin-improving acquisitions.
With this virtuous cycle of improved margins, increased cash flow, and investments in future growth working at full tilt for several years, it’s no surprise that Intertek is richly valued at 25 times forward earnings. This is pricey, especially for a company so exposed to the business cycle, but over the long term I see plenty of scope for it to continue consolidating a highly fragmented market and pushing margins ever higher.
Cruising along comfortably
A more familiar growth option is Carnival (LSE: CCL), the world’s largest cruise ship operator. In recent years the cruise industry as a whole has been going gangbusters as soaring demand from Americans, Europeans and, increasingly, Chinese consumers has led to an arms race in building ever bigger, more action-packed boats with price tags well over a billion dollars each.
This has cemented the high barriers to entry that Carnival and other big operators enjoy, while fast-rising supply means cruises are booked months in advance at high prices, meaning high margins for operators. In 2017, these factors helped boost group revenue 6.8% to $17.5bn with adjusted net income rising to $2.7bn.
And although the tourism-reliant cruise industry is cyclical in nature, I think Carnival’s market-leading position stands it in good stead over the long term. Furthermore, with its launch last year of the first international cruise ship designed specifically for the Chinese market, Carnival is opening up considerable scope for entering this new, highly profitable market in Asia.
With its shares trading at just 15 times forward earnings while offering a hearty 2.75% dividend yield and great growth prospects, I think Carnival is one great stock for new investors to consider.
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Ian Pierce owns shares of Carnival. The Motley Fool UK has recommended Carnival and 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.