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Why I would snap up this bargain FTSE 100 growth champion in 2019

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Even the UK’s largest tile specialist, Topps Tiles (LSE: TPT), is feeling the chill currently blowing through the high street. Shares in the retailer are falling today after it announced a 1.4% decline in like-for-like sales  for the first 13 weeks of the current financial year. Last year, the group registered like-for-like growth of 3.4%.

This performance is particularly disappointing for management because Topps has been pursuing a digital-first restructuring strategy, which was supposed to improve customer satisfaction and efficiency.

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Turnaround process

Figures from the trading update today suggest the reorganisation has not yielded immediate results, although we’ll have to wait for more detailed numbers to assess whether or not the restructuring has helped improve margins and free cash flow.

Ultimately, margin figures will determine how the company performs in fiscal 2019. Analysts have pencilled in earnings per share growth (EPS) 27.3%, after a decline of 27% last year. Falling sales tell me the business might struggle to meet this target, although cost-saving initiatives could help mitigate some of the declines. 

In the meantime, the stock supports a dividend yield of 5.4%, which appears safe for the time being. Indeed, looking at historical numbers, the total dividend is costing the company around £7m, compared to analysed free cash flow of £18m. Looking at these numbers, I wouldn’t recommend buying shares in Topps, but I’m not a seller either.

Impressive track record 

One company I’m much more bullish on is Ashtead Group (LSE: AHT). Over the past 10 years, this business has grown from a small UK enterprise to a global construction equipment rental group. Revenues have risen three-fold in the last six years alone, and net profit has jumped 600% over the same timeframe.

However, shares in the FTSE 100 growth giant have recently come off the boil, falling by around one third in a few months. One of the reasons why the shares have taken such a hammering is because CEO Geoff Drabble announced at the beginning of December that he is going to step down in May, after 12 years at the helm. Drabble presided over the transformation of Ashtead into a global giant, and many investors will be sad to see him go.

His successor, who currently manages the group’s North American division, will have a lot to live up to. But as long as the firm continues to follow Drabble’s lead of growth through sensible acquisitions and industry consolidation, it should be business as usual.

With this being the case, I think now is the perfect time to buy shares in Ashtead. Following recent declines, the shares are trading at a P/E of just 9.8. That’s significantly below the five-year average of around 12 and, in my mind, undervalues the group’s growth potential. City analysts have pencilled in EPS growth of 65% over the next two years on a normalised basis. In my opinion, this kind of growth deserves a mid-teens valuation.

There’s something for income seekers as well. The shares currently support a dividend yield of 2%, which might seem stingy. But over the past six years, the distribution has grown at a compound annual rate of 35% and is currently covered 4.7 times by EPS. So, to my mind, it won’t take long for the payout to reach more attractive levels.

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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.

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