Over half the companies in the FTSE 100 have had their earnings forecasts downgraded by City analysts in recent months. Over a third are now expected to post a fall in earnings this year. Thankfully, there are still plenty of thriving businesses around for blue-chip growth hunters.
The table below shows the FTSE 100’s 10 largest-cap growth stocks (as defined by financial data website Morningstar). In this article, I’ll give my view on their valuations and prospects.
|
|
EPS growth last year (%) |
EPS growth forecast current year (%) |
EPS growth forecast next year (%) |
Current year P/E |
Current year PEG |
|
Unilever |
5.3 |
6.3 |
9.9 |
22.1 |
3.5 |
|
Diageo |
10.3 |
7.4 |
8.2 |
24.5 |
3.3 |
|
Reckitt Benckiser |
6.4 |
1.1 |
4.3 |
17.9 |
16.3 |
|
Relx |
5.6 |
8.5 |
7.9 |
21.0 |
2.5 |
|
Compass |
7.3 |
8.0 |
8.2 |
24.7 |
3.1 |
|
London Stock Exchange |
16.9 |
9.0 |
17.8 |
36.3 |
4.0 |
|
Experian |
3.8 |
7.1 |
10.5 |
29.1 |
4.1 |
|
Rolls-Royce |
582.9 |
24.7 |
60.4 |
38.6 |
1.6 |
|
Ashtead |
36.6 |
17.9 |
11.0 |
10.3 |
0.6 |
|
Intercontinental Hotels |
19.4 |
6.5 |
7.7 |
20.3 |
3.1 |
As you can see, all 10 companies posted growth in earnings per share (EPS) last year, and are forecast to deliver further growth this year and next — as much as 60% in Rolls-Royce’s case.
Six I’d hold and two I’d buy
Valuable consumer brands are the hallmarks of Unilever, Diageo and Intercontinental Hotels. Meanwhile, Compass is the world’s largest contract caterer and Experian is the world’s leading credit reference agency. London Stock Exchange, as well as its flagship asset, is increasingly becoming a global financial information powerhouse.
These six companies have what Warren Buffett calls wide moats — qualities that make it difficult for other firms to dislodge them. As you can see, they trade at premium price-to-earnings (P/E) ratios of over 20 and premium price-to-earnings growth (PEG) ratios in the three-to-four region. Investors may still do well over the long term buying at these valuations, but personally I see them as a little too elevated right now and rate them a ‘hold’.
Information and analytics provider Relx is the owner of some of the world’s largest databases in valuable medical, legal and other areas. With a considerable captive client base, I see the company as having similar moat qualities to the six above. However, its lower PEG of 2.5 inclines me to rate it a ‘buy’.
Rolls-Royce, one of the world’s big three aero-engine makers, has returned to growth after a major restructuring of the group. It’s P/E of 38.6 is the highest, but its PEG of 1.6 suggests it could be good value for the high rate of recovery growth on offer. As such, it looks very buyable to me right now.
One outlier I’d buy and one I’d avoid
Reckitt Benckiser’s PEG of 16.3 and Ashtead’s 0.6 make them outliers. There was a time when Reckitt — owner of valuable home and health brands — was valued higher than Unilever by the market. Its current sub-20 P/E and sky-high PEG reflect a period of transition in the business and what I believe is a temporary phase of lower growth. I think RB could be set to unlock value for shareholders, and I see its current out-of-favour status as representing a good opportunity to buy in.
On the face of it, North America-focused equipment rental group Ashtead is as cheap as chips, with a P/E of little more than 10 and a sub-1 PEG. However, it’s made literally dozens of acquisitions in recent years, and I’m a little wary of such aggressively acquisitive companies. With it also being highly geared to the economic cycle, and the current cycle looking long in the tooth, I lean towards avoiding the stock at this stage.
