On The Beach Group (LSE: OTB) is a little-known share whose price has been going gangbusters in recent weeks. Up 33% since the turn of January, but still trading on a dirt-cheap valuation — a forward PEG ratio of 1.1 — I reckon there’s plenty of scope for it to keep on climbing.
Why so? Well it’s not in response to soaring customer numbers in recent times, sales at the travel operator suffering over the summer because of the extraordinarily hot weather in Europe that prompted citizens to vacation at home.
Instead, the market has been impressed by On The Beach’s online-only model which allows it to dynamically reduce costs in times of declining revenues. This meant that pre-tax profit in the 12 months to September 2018 still surged 24% year-on-year to £26.1m. And with slowing economic growth in the UK and continental Europe threatening to impact holiday bookings over the medium term, this quality is worth its weight in gold.
A sunny selection
Discarding those near-term revenues worries, On The Beach is a share in prime position to lasso the growing number of travellers booking their holidays online as a consequence of the e-commerce phenomenon. It also boasts the flexibility to allow it to react to changing consumer trends more effectively than its traditional high street rivals, and all this is likely to underpin scintillating earnings growth looking ahead.
My view is shared by City analysts who anticipate that earnings will continue to improve by double-digit percentages over the next two years at least. And this leads to predictions that dividends will keep shooting skywards as well, the 3.3p per share reward of fiscal 2018 anticipated to rise to 3.9p this year and 4.7p in the next period.
Subsequent yields of 0.9% and 1.1% for this year and next, respectively, clearly aren’t the biggest on the market. Still, for long-term investors I reckon the rate at which On The Beach is raising dividends, and is likely to continue to do so, makes it a white-hot income share to buy today.
Another recent riser
Lookers (LSE: LOOK) is another company whose appeal to stock pickers has surged since the turn of the year, its market value jumping 12% in that time.
Unlike On The Beach, though, quite why this share is surging is a bit of a mystery to me, I’m afraid. Okay, its prospective P/E multiple of 7.6 times makes it cheap. Predicted dividends of 4.2p and 4.5p for 2019 and 2020 respectively will have made income investors sit up too, because of their subsequent 4% and 4.3% yields.
But the car dealership’s share price rise comes against a backcloth of rising fears over Brexit and whether this will prolong the economic downturn Britain is currently experiencing, a phenomenon that official figures show is pummelling auto sales (SMMT figures showed new car sales dropped 7% in 2018 to 2.37m units). In this environment it’s not difficult to foresee Lookers’ share price reversing sharply again. And for this reason I am prepared to give it a wide berth.
Royston Wild has no position in any of the shares 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.