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These 2 growth stocks have thrashed the index but there’s one thing that worries me

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These are great days for WH Smith (LSE: SMWH). Its share price is up almost 8% this morning, after it posted a strong trading performance and announced the acquisition of leading US travel retailer Marshall Retail Group.

Smiths shines

The books, stationery, magazines, newspapers, gifts and toys retailer has been a winner for investors lately, with the stock up 98% over five years. That’s good going for a high street and railway station fixture that many investors may view as fusty and unglamorous.

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Today’s preliminaries for the year to 31 August showed group revenue up 11%, albeit just 1% up on a like-for-like basis, while its Travel division did particularly well with total revenue jumping 22%. That falls to 8% once you exclude the recent InMotion acquisition, and 3% on a like-for-like basis.

WH Smith has just won its first stores in a major US airport, and now boasts a record number of international units, 433 at the end of August. It operates across 30 countries and over 100 airports, with “significant wins” recently across Europe, the Middle East and Australia. High street profits of £60m were the same as last year, but up £2m in the second half.

It’s good to travel

Group CEO Stephen Clarke, who exits at the end of this month, is pleased with the progress despite uncertainty in the broader economic and political environment, and said the group will continue to focus on profitable growth, cash generation, and delivering value for shareholders.

It also announced a proposed 8% increase in the final dividend, which Clarke said reflects the group’s cash generation and confidence.

My only concern is that the £2.4bn FTSE 250 group isn’t cheap, trading at 18.2 times forward earnings. But its prospects remain strong, with analysts expecting earnings to rise 10% next year. The yield is 2.8%, covered exactly twice, but the payout has risen regularly.

What I particularly like is it offers further growth prospects as it spreads its wings internationally, while its travel business makes it more than just a magazine stockist. Management has also completed a £31m share buyback. Definitely one to watch and, maybe, even buy.

Rentokil cleans up

FTSE 100 listed Rentokil Initial (LSE: RTO) is also in investors’ good books today, up around 2% after its Q3 trading update hailed “another strong quarter.” Ongoing organic revenue growth of 5.5% is also its best in more than 10 years.

Revenues from pest control look particularly healthy, up 12.3%, or 5.9% on an organic basis, with its North American, UK & Rest of World, and Latin American operations doing well. Its global reach helps to make it Brexit proof.

Rentokil is acquisition hungry, ​buying 15 businesses in the quarter, with annualised revenues of around £15m. Loyal investors have been well rewarded, with the share price soaring by 292% over the past five years, and almost 45% this year alone. It’s absolutely thumped the FTSE 100, whose comparative figures stand at 13% and 1.8%, respectively.

Unfortunately, all this growth comes with a price tag. The £8.3bn group now trades at a whopping 31.7 times forecast earnings, while the yield is just 1.1%, although nicely covered 2.8 times. Rentokil needs to keep powering ahead, to justify its valuation. That may explain the relatively cool response to today’s numbers.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended WH Smith. 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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