Take Experian (LSE: EXPN) for example. This is one of the world’s largest and most experienced data management companies, best known for its credit-rating services, although this is just one part of the group. 

The company also uses data to help other businesses and brands connect with customers as well as offering services to help enterprises streamline their operations with the use of data.

Fat profit margins 

The great thing about data is that, unlike other commodities, it’s relatively easy and cheap to collect, especially for companies like Experian which dominate certain parts of the market. 

Because data is relatively cheap to collect, but customers are willing to pay a premium to get hold of the information, Experian books an impressive operating profit margin of 24%, putting it in the top 25% of the most profitable companies listed in London today.

Experian is also highly cash generative. For the financial year ending 31 March 2018, the company reported a free cash flow of $769m. Management is returning virtually all of this free cash flow to investors. Last year, for example, Experian paid out a total of $392m in dividends and $565m in share buybacks.

Growth continues

I think this trend will not only continue, but cash returns will increase. Thanks to the world’s ever-increasing demand for data and data services, Experian’s earnings per share have grown at a compound annual rate of 29% over the past six years. 

With this being the case, it’s no surprise that shares in Experian have returned 19.5% per annum for investors over the past 15 years, turning every £1,000 invested into £16,300.

So, even though its shares trade at a forward P/E of 26.5, I think they have the potential to make you rich as Experian continues to build on its leading position the global market for data collection and data management.

Complex product 

As well as Experian, I’m also interested in Alfa Financial Software (LSE: ALFA). In some respects, this is another data play. The company develops mission-critical software for the asset finance industry, a highly valuable and regulated market.

Unfortunately, shares in Alfa dived last year after it warned on trading due to the slower than expected conversion of its sales pipeline. This extra friction caused the group’s revenue to fall by 19% for the year, and operating profit declined 34%. However, like Experian, the company is highly cash generative and its net cash balance increased 43% to £45m during the year, even though growth slowed.

Management is optimistic the headwinds that held it back in 2018 won’t be repeated. Alfa is currently progressing contractual discussions with a new sizeable European customer. It’s also entered the second phase of implementation for an existing multinational customer, which should produce a positive outcome this year, according to Alfa’s 2018 results release.

City analysts think the company will return to growth in 2019, and I’m inclined to believe them. They’re expecting the group to report earnings per share of 6.3p for 2019, up 16% year-on-year and giving a forward P/E of 19.7. This multiple might seem expensive at first glance, but when you factor in the business’s operating margin of 38%, I think it’s a premium worth paying.

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

However, while some growth stocks have made their investors rich, others have struggled lately. Here are the three worst growth stocks of 2018 so far. 

Rising costs

Growth star Asos (LSE: ASC) has fallen from grace this year as investors have baulked at the group’s escalating capex spending. 

Even though the company announced a 27% increase in sales for the six months ending in February, the firm is having to spend more to keep its edge over competitors. For the next two years, Asos is planning to spend £230m-£250m on logistics and distribution facilities, up from initial guidance of £200m-£220m.

Compared to current City forecasts for net profit of £81m for fiscal 2018, this figure is significant. With shares in Asos trading at 52 times forward earnings, management can’t afford to disappoint investors. 

Unfortunately, it looks as if this is what it has done. After rising 13% during the first quarter of 2018, it slumped following results. The stock is now down 13% for the year, a decline of 26% from the peak. 

To rebuild investor confidence, Asos needs to prove that it remains ahead of the competition, and the only way to show this is with profit growth. But I believe there could be further declines ahead.

Bust IPO 

Last year, Alfa Financial Software (LSE: ALFA) made a splash as the biggest IPO in London. The company has not lived up to the hype. Year-to-date the stock has cratered 70%.

Earlier this year, the company issued a profit warning announcing that a major customer had paused its implementation of Alfa’s software, following data migration issues. As well as this headwind, the group also warned that contract completions with two other companies were taking longer than expected.

As a result, City analysts believe the group will miss revenue expectations for the year by around £20m, which is a big deal. Analysts have slashed EPS expectations for the year from 11.4p to 5.5p. Even at this lower level, the stock looks expensive, trading at 26 times forward earnings. 

I like to avoid companies where the loss of just one client can make or break a year of performance and Alfa is no different. In my view, the risk here far outweighs the reward. 

Failed acquisition 

In 2017, Animalcare Group (LSE: ANCR) completed what management initially described as a transformative acquisition with Belgian veterinary business Ecuphar.

The deal has been transformative, but not in the way management or shareholders might have hoped. Integration is proving tricky. Full-year results for 2017 showed a decline in EBITDA margins from 13% to 11% as difficult trading conditions forced the enlarged enterprise to slash prices. Cash profit fell 9%.

Investors have lost trust in the highly-rated company. The shares are down 50% year-to-date and nearly 60% since the merger. The valuation has fallen from a forward P/E of 31 in September 2017 to just 11.7 today. The one good thing about the decline is the stock now looks cheap, but I would wait for further evidence that the business is back on track before buying.

The post The 3 worst growth stocks of 2018 (so far) appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.

This is why I believe Alfa Financial Software (LSE: ALFA) and Microgen (LSE: MCGN) are perfect buy-and-forget growth stocks to hold for the next 10 years.

Profits double 

Today Alfa reported its first annual results since its IPO last year, showcasing its strengths. The company, which provides “mission critical software for the asset finance industry,” announced today that revenue for 2017 rose 20% to £88m, or 9% year-on-year to £86m at constant currency. Pre-tax profit surged to £34m, double last year’s reported figure of £17m.

However, it seems that the market is displeased with management’s growth outlook. Due to currency fluctuations, growth is expected to slow in 2018. Specifically, alongside today’s numbers, CEO Andrew Denton said a backdrop of a weakening dollar means the board expects to report low double-digit top line growth on a budget rate, or mid double-digit growth on a constant currency basis. It seems investors have also been disappointed by the lack of a dividend announcement for the year.

Still, despite this downbeat outlook, the long-term opportunity ahead of Alfa, and its peer Microgen, is tremendous. For example, Alfa estimates its addressable software market is over $3bn, compared to its current revenue run-rate of £88m ($123m).

City analysts are expecting the firm’s earnings per share to jump 15% for 2018 after last year’s surge in profitability. And as long as Alfa continues to provide a professional service to clients, I believe earnings can continue to grow at a double-digit rate for the foreseeable future.

Growth through acquisitions 

Bolt-on acquisitions are another tactic Alfa can use to boost growth. Microgen has chosen this route, using organic cash flow to buy up growth. In August of last year, the firm announced the acquisition of RevStream Inc, a California-based provider of revenue management enterprise software expanding its portfolio of mission-critical software businesses.

Following this deal, and others like it, the firm’s adjusted earnings per share increased by 39% to 17.1p for 2017, smashing City estimates of 15.2p. After this strong performance, it looks as if analysts are behind the curve with the company as they were expecting earnings per share of 18.3p for 2018. Considering 2017’s outperformance, I wouldn’t be surprised if analysts revised their forecasts for future growth substantially higher in the months ahead.

Unfortunately, the one problem with both Microgen and Alfa is that the shares currently command a high valuation. Shares in Microgen are trading at a forward P/E of 27.8 and Alfa is trading at a forward P/E of just under 40. While high, these valuations reflect the bespoke and sticky nature of these businesses’ revenue streams and future growth potential.

The post 2 secret growth stocks I’d buy and hold for 10 years appeared first on The Motley Fool UK.

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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.

Whether you view short sellers as an integral part of a healthy capital market or opportunistic parasites, the accusations have likely done interested investors on the outside looking in a favour. IQE’s once astronomical valuation has now come down to a more palatable 38 times forward earnings. But this valuation still prices in several years of expected growth, which is always risky with fast-moving tech firms.

An additional worry is that the short sellers’ reports do raise valid questions about the group’s corporate governance structure. Now these could be nothing more than growing pains of a previously tiny and obscure company that is now unexpectedly in the limelight. But I’ve seen too many AIM-listed stocks wilt under poor corporate governance standards to invest in IQE right now due to questions surrounding its relationship with joint ventures and accounting practices.

Another issue giving me pause is the group’s rapid expansion. In November, it issued shares representing 9.9% of its previously issued capital to raise £95m for expansion purposes including a significant increase in the volume of machinery at its new foundry. While the group’s sales are currently rising at a brisk pace and it’s good to see management investing to meet demand anticipated several years out, there’s always the risk that changes in the industry could see the company saddled with excess capacity.  

Likewise, while IQE supplies a series of chip makers rather than just one or two, its sales are still fairly concentrated. The industry is also undergoing rapid changes with a series of acquisitions, business model shakeups and customers squeezing suppliers’ margins. As a small player in the wider industry, these changes risk buffeting IQE’s fortunes, which together with short sellers’ concerns make the company’s valuation too high for me to invest in the stock right now.

This recent market entrant makes a splash 

I’m much more interested in Alfa Financial Software (LSE: ALFA), which designs and supplies software for the asset financing sector. Like IQE, Alfa trades at a lofty valuation of 38 times forward earnings. But I believe the sticky nature of its product — which is used by financial institutions such as RBS and carmakers such as Mercedes-Benz North America — and rapid growth warrant such a premium.

In the half year to June, the group’s sales leapt 29% year-on-year in constant currency terms to £45.1m as it landed two new contracts, completed three software implementation programmes, and increased recurring revenue streams from existing clients. Looking forward, there’s still plenty of room to grow as its software is in high demand from a range of lenders looking for an easy-to-use, unified programme to keep track of and service loans.

With the founder-led management team investing in building up the company’s developer ranks, the group’s large sales pipeline should be quickly converted into cold hard cash. And with a large net cash position, high profitability and plenty of room to grow, I think Alfa could be a great long-term holding. 

The post Why I’d sell IQE plc in favour of this hidden tech gem appeared first on The Motley Fool UK.

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Ian Pierce 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.

Well, sort of. Management isn’t targeting its first annual profit since 2007 until next year and qualifies that this target is based on the still-to-be-decided size of its expected multi-billion-pound settlement with the US Department of Justice over the mis-selling of mortgage backed securities in the dark days of the financial crisis.

There’s still no concrete timeframe for when this settlement will conclude, but some analysts expect it to be twice the £4.2bn payout agreed with the Federal Housing Finance Agency earlier this year. The bank has already stashed £2.8bn for the expected fine, but if it’s substantially over this mark, expect that first annual profit to be pushed back yet another year.

That said, management is doing well in fixing the issues it actually has agency over. In the first nine months of the year, its heavily adjusted cost-to-income ratio fell from 65.9% to 53.9%, while its statutory return on tangible equity (RoE) flipped from a substantial negative to 5.2%. This means the bank’s 2020 target of a sub 50% cost-to-income ratio and RoE over 12% remain achievable.

However, there is still a lot of heavy lifting to be done. With the mega-fine threatening to wipe out several years’ worth of underlying profits, plenty of costly restructuring still ahead, and the prize at the end of the road a highly competitive retail banking market with low interest rates equalling low profitability, I see many better places to invest my money than RBS, even if it is finally, possibly, back on the right track.    

An already profitable alternative 

Much more attractive to me is a supplier of RBS, Alfa Financial Software (LSE: ALFA). The tech firm provides software to the asset finance sector, which covers everything from consumer auto loans to firms purchasing machinery on credit.

As the regularly shambolic performance of big banks’ IT systems illustrates, the finance industry does not have a great track record of designing its own software. That’s where Alfa comes in, with a cloud and computer-based platform that is tailored to a customer’s specific needs and often comes with a price tag much lower than doing it in-house.

Unsurprisingly, this offer has been a hit with car companies, banks and even Uber. In the half year to June, its first reporting period as a public company, revenue was up 29% in constant currency terms to £43.9m while adjusted operating profits were up 20% to £20.2m.

More than half of the firm’s revenue comes from the early years of a contract as it works to embed its software in clients’ systems and train their personnel in using it. However, over the long term, there is considerable potential for Alfa to increase its percentage of recurring revenue, which brought in £10m in H1 compared to only £2.4m in the year prior.

Alfa’s shares aren’t cheap at 45 times forward earnings but with no debt, high profitability and huge growth potential, I see plenty to like.  

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Ian Pierce 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.