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Are these the best growth stocks in the FTSE 250?

The FTSE 250 is full of growth stocks, but there’s one company that stands out more than most. 

Autotrader (LSE: AUTO), which is famous for its eponymous (but now closed) magazine and its website, has achieved the highest rate of earnings growth of any company in the FTSE 250 over the past three years. Its earnings per share have expanded at a compound annual growth rate of 121% since 2015 according to my figures.

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The only other company in the FTSE 250 that even comes close to this record is Virgin Money, which has been able to chalk up a growth rate of 97%. 

Today the firm reported another leap in earnings for the year ended 31 March 2018. Basic earnings per share, which have been boosted by £96m of share buybacks, jumped 15% as pre-profit ticked 10% higher. 

Cash cow 

As Autotrader, which closed its magazine business in 2013, is primarily an online marketplace for vehicles, the group is highly profitable. It does not need to spend heavily on stock or buildings as it just takes a fee from customers for its services. 

This business model is highly cash generative. For the year to the end of March, on revenues of £330m, the firm generated £226m of cash, converting 107% of pre-tax profit to cash. 

The cash generation is, in my opinion, the group’s best quality. A business that throws off so much cash is almost certain to produce impressive returns as cash is channelled back to shareholders. Indeed, management returned £148m to shareholders last year through buybacks (as mentioned above) and dividends. Meanwhile, net external debt was reduced to £339m from £335m, and the remainder was reinvested in the business, funding the development of Autotrader’s new Dealer Finance and InSearch products. 

As it continues to return the majority of cash generated from operations to investors, and invest in its product offering, I believe that the company’s explosive growth should continue. And with this being the case, the stock’s valuation of 18 times forward earnings, seems to undervalue its prospects. 

Investment paying off 

Another growth stock I’m excited about is Kaz Minerals (LSE: KAZ). This company might not be in the same league as Autotrader when it comes to historic growth, but City analysts are expecting big things going forward. 

The company has spent the last five years building itself for the future, and these efforts are now really starting to pay off. After investing $3.5bn in two major copper mines, Bozshakol and Aktogay in Kazakhstan, production in 2016 leapt 73% to 140,000 tonnes and nearly doubled in 2017 to 260,000 tonnes. For 2018, management believes the firm can produce as much as 300,000 tonnes. As production has ramped up, Kaz has also benefitted from a tailwind of rising copper prices (up around 50% in the past three years).

The combination of higher output and higher selling prices has helped the firm’s net profit rise from virtually zero in 2015 to an estimated $668m for 2018. Analysts are predicting earnings per share of $1.50 (up 43%) for the year, indicating a forward P/E of 9.6 and a PEG ratio of 0.2, which implies the shares are undervalued compared to the growth Kaz is expected to report. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Auto Trader. 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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