Has Dechra been doing well?

You could say that. Thanks to a combination of manufacturing sites remaining operational during the pandemic and the explosion of pet ownership, this firm has been very busy indeed. As CEO Ian Page said recently, it’s clear “people have been spending more time with their pets and have therefore been more cognitive of their welfare”.

All this has really boosted DPH’s top line. In July, the company said a “stronger than expected trading performance” had continued to the end of June. It now expects group revenue for the full year to come in 21% higher.

Pleasingly, a good amount of this growth was organic. However, the acquisitions of products such as ear infection gel Osurnia and weight gain drug Mirataz have also helped. The latter is already performing “ahead of expectations” following its launch. 

FTSE 100 beater

As one might expect, such robust trading has done the DPH share price no harm. Having climbed nearly 70% over the last 12 months, the company is currently valued at £5.7bn. In sharp contrast, the FTSE 100 has climbed ‘just’ 19% since August 2020. 

This difference in returns is even starker over the long term. Had I bought the stock five years ago, I would have trebled my money. The FTSE 100 is up a little less than 4% since 2016. In short, Dechra Pharmaceuticals is another example of how investing in a fairly concentrated group of individual stocks has the potential to deliver a far better return than the index.

Sky-high valuation

This is not to say there are no drawbacks to investing here.

The first relates to its valuation. Having done so well, the shares now look seriously expensive to acquire at 46 times earnings. For that price, I want to see a company generating things like sky-high returns on capital. That’s not the case here. Yes, pet ownership shows no signs of decreasing. And yes, the share price could also conceivably rise as FTSE 100-focused funds are forced to buy. However, I’m still not sure I’d be getting great value for money.

Despite being a regular dividend-hiker, DPH also wouldn’t be my first choice if I were looking to produce income from my investments. Based on a potential 41.1p per share return in the current financial year, the stock yields just 0.7%. That’s a lot less than that offered by some stocks in the top tier. Even the FTSE 100 index as a whole yields 3.4%.

I’d buy the (inevitable?) dip

As someone who’s hugely positive about companies operating in the petcare space, I’m not surprised by Dechra’s almost certain promotion to the FTSE 100. Then again, I can’t help but think that an awful lot of good news is priced in. So, this business stays on my watchlist for now. Should markets take a turn for the worse and good stocks fall alongside bad ones, I’ll be more likely to pull the trigger. 

The post FTSE 100 reshuffle: time to buy this hot growth stock? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt and Morrisons. 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.

What’s the deal?

Under the terms of the deal, owners of the stock will receive a round 800p for every share that they own. This would be a 70.5% uplift on the Meggitt share price last Friday. As Mondays go, I can think of worse ways to start a week as an investor!

It’s not hard to see why Parker would be interested in acquiring the FTSE 250 member either. Both already supply defence equipment to the UK and US governments, as well as those in the EU. Snapping up Meggitt would also allow the $47bn giant the opportunity to double its Aerospace Systems segment. 

The latter could be great timing on Parker’s part. Describing the deal as “strategically and culturally compelling”, Meggitt’s potential suitor believes the deal will allow it to take advantage of strong growth opportunities going forward, especially as the world gets back to normal after Covid-19 and commercial aerospace recovers.

Based on its calculations, Parker believes its earnings will increase in the first full year after the deal is done. It’s certainly no stranger to acquiring and successfully integrating UK companies.

This is not to say that Meggitt will be moving across the pond. To allay any fears, Parker has already said that it will keep the components supplier headquartered in the UK and ensure that the majority of Meggitt’s board is made up of UK nationals. R&D spending will also be maintained (and possibly increased) in the years ahead.

Meggitt share price: what now?

Unsurprisingly, Meggitt’s directors have unanimously recommended that shareholders vote to accept the takeover. This is where things get even more interesting.

The Meggitt share price was trading around 730p a pop this morning. That’s up a whopping 55% on last Friday’s closing price. However, it’s still almost 10% below the offer price mentioned in today’s statement.

The question is whether today’s news will bring out another bidder. As Morrisons has shown, it only takes one buyer to show their hand before others arrive on the scene. Then again, a premium of over 70% is already very generous and takes the share price back above pre-Covid levels. Another potential suitor would really need to dig deep.

There is, of course, always a chance the deal might fall through. Holders may reject the offer, thinking they can get more for their company. Should this be the case, I’d expect the share price to become volatile if no one else steps forward. It’s interesting to note that gaming firm Sumo Group‘s valuation has begun to drift since it received an offer from China’s Tencent in mid-July. Then again, this might have something to do with the internet giant hitting the headlines back home!

UK plc on sale!

Regardless of what happens next, today’s announcement is more evidence that the (relatively cheap) UK market is continuing to attract overseas bidders. As such, I don’t think this will be the last big takeover we’ll be hearing about in 2021. Indeed, I suspect FTSE 100 firm Burberry could be one of the next to receive an offer or two unless it takes steps to reassure investors.

The post Here’s why the Meggitt share price is rocketing today! appeared first on The Motley Fool UK.

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Paul Summers holds shares in Burberry. The Motley Fool UK has recommended Meggitt, Burberry and Morrisons. 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.

Stay grounded

Yet don’t overlook Meggitt, which has been going great guns over the last year, its share price up 20%, despite suffering knock-on effects from the Boeing 737 MAX groundings.

Today’s update was otherwise fairly positive, with Q3 trading stronger than previously anticipated, and overall group revenue growth of 11%, boosted by a particularly strong performance in its defence division, where revenues grew 20%.

The £4.83b group is upgrading its guidance for full-year organic revenue growth, if only slightly, from 4%–6% to 6%–7%. However, margins will be squeezed by the Boeing groundings and “pressures across our internal and external supply chain driven by the unprecedented ramp up in new aircraft production”, with full-year operating margins expected to be at the lower end of guidance, between 17.7%–18.2%.

Investors no doubt wanted more, given that the group trades at a relatively pricey 17.7 times forward earnings. The yield is 2.8%, with cover of 2.1. That may seem low, but as I said, management is progressive. Earnings can be variable due to contract timings, but City analysts are forecasting 7% growth this year and 11% next.

Today’s results may seem slightly underwhelming but the long-term flight path still looks solid to me.

GAW, GAW, not war, war

Meggitt’s not half as exciting as my other FTSE 250 stock pick, Games Workshop Group (LSE: GAW), which manufactures miniature war games such as Warhammer Age of Sigmar, and describes itself as “the largest and the most successful tabletop fantasy and futuristic battle-games company in the world”. The £1.73b group is up a thundering 725% over the past five years, and is continuing the momentum, with 45% share price growth in the last 12 months.

Defensive investors traditionally migrate to tried and trusted sectors such as pharmaceuticals and utilities, but maybe you’d be better off targeting niche companies like this one, with its army of die-hard, ever-so-slightly nerdy hobbyists. Its loyal fanbase insulates the company from many retail pressures, while its network of stores backs up its online operation.

Games Workshop’s latest trading statement is brief to the point of brutality, reporting that sales and profits are ahead, with royalties receivable doing particularly well due to the timing of guarantee income on signing new licences, while its results for the six months to 1 December 2019 are sales of not less than £140m and profit before tax of not less than £55m.

Better still, the group is expanding internationally, with stores in the US and Europe, so it’s no fantasy to suggest current growth rates really could continue. The group trades at 23.7 times forward earnings, but in fact I was bracing myself for a more expensive valuation, and I like its return on capital employed figure, of 90.3%. Some reckon this visionary group could be on course for the FTSE 100.

The yield is 2.9%, covered 1.4 times, which is solid when you take into account its recent blood and guts share price growth. The Games Workshop share price could help you battle through the mortal realms to achieve your ultimate goal: a more lucrative retirement.

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

I reckon, though, that the business is an undervalued gem. Carrying a forward P/E ratio inside the bargain bin basement of 10 times or below (at 7.5 times), and boasting a brilliant corresponding dividend yield of 5%, on paper it certainly provides plenty of bang for your buck.

And I reckon this low, low rating could prompt a flurry of buying in the weeks ahead. Indeed, there are many robust trading statements that I’m expecting from Britain’s homebuilders in August alone — Taylor Wimpey, Persimmon and Bellway are a few slated to update the market — and I believe this could cause a slew of positive energy to flow across the entire sector.

Escape to the country

Countryside has itself put in a rosy update of its own in recent days, one which has helped its share price climb off those aforementioned troughs. In it, the Essex business celebrated the “strong customer demand” which it keeps witnessing across all of its categories of homes and in spite of the prolonged uncertainty being brought about by Brexit.

So while completion numbers and average selling prices were broadly stable year-on-year in the three months to June, Countryside saw the net reservation rate rise 12% to 1 and its total order book swell 17% to £1.14bn. It’s no wonder that the business plans to turbocharge build rates from the current quarter.

What’s particularly rare about this housebuilder is the fact that, unlike most of its competitors, City analysts for the most part expect annual earnings to keep soaring in spite of the slowdown in the broader housing market.

Bottom-line rises of 10% and 11% are estimated for the years to September 2019 and 2020 respectively, figures which make Countryside’s dirt-cheap valuations all the more bewildering in my opinion. If you’re looking for a terrific dip buy paying big dividends, I reckon this is a stock worth a place in your portfolio.

Set to soar?

I would extend my bullishness to Meggitt (LSE: MGGT), not that this FTSE 250 share has experienced any share price woe of late. In fact, a recent spurt has taken it to record peaks just shy of 600p.

It’s worth considering the possibility of additional gains once the aerospace giant unveils interim results on August 6. Meggitt certainly impressed last time out in late April when it cheered “strong” trading in the first quarter. That was thanks to robust end markets and its programme of increasing content on new aircraft classes, with revenues rising across both defence and civil aviation segments.

Unsurprisingly, City analysts expect earnings growth to accelerate over the medium term, an anticipated 5% rise for 2019 giving way to a predicted 10% increase next year. And combined with its exceptional cash flows, Meggitt’s expected to keep its progressive dividend policy in tow, resulting in an inflation-mashing forward yield of 3%. I reckon this is another top FTSE 250 buy for next month.

The post Have £2k to invest in the FTSE 250? Here are 2 dividend stocks I’d buy in August appeared first on The Motley Fool UK.

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Royston Wild owns shares of Taylor Wimpey. The Motley Fool UK has recommended Meggitt. 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.

Many of these medium-sized firms boast long and profitable trading histories, but are still expanding. Today I’m going to look at three dividend growth stocks from the FTSE 250 that I’ve been eyeballing for my own portfolio.

Smooth flying

Shares in engineering group Meggitt (LSE: MGGT) edged higher this morning after the firm reported underlying revenue growth of 9% for the first quarter. The firm’s business is split into three divisions, civil aerospace, defence and energy.

The largest of these is aerospace, which accounts for 54% of group revenue. The firm has operated in this sector for more than 80 years and says that “almost every jet airliner, regional aircraft and business jet in service” carries some of its equipment.

This dominant market share is a key attraction for me, especially as the firm’s defence business enjoys similar characteristics.

Although management warned today that air traffic growth could slow this year, it remains confident of delivering “strong revenue growth” with stable profit margins. The shares trade on about 15 times forecast earnings with a 3.4% dividend yield. That seems fair to me, given the group’s steady growth.

I suspect Meggitt will end up in the FTSE 100 in a few years. I see the shares as a long-term buy.

Recruitment success

Another FTSE 250 firm that’s impressed me recently is international recruitment group Hays (LSE: HAS). Its net fee income rose by 6% during the three months to 31 March, with like-for-like growth in all regions including the UK.

Chief executive Alistair Cox reported a “mixed economic backdrop across Europe” but said that the group’s main market of Germany grew by 6%. Elsewhere, Hays’ Australia and New Zealand business reported its 19th quarter of growth.

Although the future is uncertain, I think Hays’ size and geographical diversity should mean that it’s in a good position to cope with any regional slowdowns. In the meantime, profit margins are stable and cash generation remains very strong. Analysts expect earnings growth of 4%-6% per year in 2019 and 2020. With the shares offering a forecast yield of 4.6%, I think Hays remains worth buying.

A better buy than utilities?

Traditional utility stocks have been a poor investment in recent years. Several big names have cut their dividends and share price performance has been poor. The risk that utilities might be renationalised by a Labour government is also a concern.

If you’d like to invest in utilities but are looking for a safer choice, one company I’d consider is Telecom Plus (LSE: TEP), which trades under the Utility Warehouse brand. This business is a buying club that secures bulk-buy deals on energy, broadband and mobile which it resells to members.

Businesses of this kind aren’t always great investments. But Telecom Plus has been in business for more than 20 years and famously never advertises, relying on word-of-mouth and a network of agents. This approach has served the firm well. Sales have risen by 20% over the last five years. The group’s dividend has risen by 43% over the same period.

This business generates a lot of spare cash, most of which is returned to shareholders. The current dividend yield of 3.6% could be a good starting point. I’d buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.

High flyer

FTSE 250 group Meggitt (LSE: MGGT) is up 20% in the last year against the 1.8% on the FTSE 100, although its stock is idling today despite posting strong growth in orders and revenues for full-year 2018. Organic orders grew 12%, underpinning expectations for long-term revenue growth, while organic revenues climbed 9%, which management said reflects strong performance in growing end-markets.

Meggitt maintained its underlying operating margin at 17.7%, helped by efficiencies from strategic initiatives and lower new product introduction costs. It remains confident of delivering its 2021 margin target of at least 19.9%. 

Backfired 

The disappointment was a drop in statutory pre-tax profit from 2017’s restated £228.3m to £216.1m. However, this included a £10.1m non-cash loss from the marking to market of financial instruments, principally currency hedges. Earnings per share fell 39% to 23.2p, while free cash flow dipped 15% to £167.4m.

Chief executive Tony Wood nonetheless hailed “a landmark year for Meggitt, with strong performance underpinned by our increased content on new aircraft programmes and growing end-markets.” Management recommended a final dividend of 11.35p a share, taking the full-year dividend to 16.65p, up 5% on the previous year.

The £4.35bn company trades at 15.6 times earnings despite its year of growing strongly, although its PEG is relatively high at 1.7. The yield is now 3.2%, with cover of two, but management policy is progressive. Kevin Godbold recently noted that it has increased its dividend by 24% over the last four years. The earnings outlook seems positive, with forecast growth of 5% in 2019, then another 11% in 2020. Meggitt isn’t quite shooting for the stars, but it’s a steady grower. 

On track

FTSE 100 engineering giant Rolls-Royce Holding (LSE: RR) has given investors an alarmingly bumpy ride in recent years, but things have been less choppy lately, with the stock up 17% in the last 12 months. Chief executive Warren East appears to be getting the show back on the road.

The £18.5bn group publishes its full-year 2018 results in a couple of days, but its accounts aren’t so easy to decipher. Consensus forecasts suggest a dip on sales from £16.3bn in 2017 to £14.8bn, although most of that relates to the adoption of International Financial Reporting Standard IFRS15, which allows the company to recognise revenue on long-term contracts.

Eastern promise

Analysts also predict a sharp drop in pre-tax profits from £4.9bn to £322m but, again, don’t panic, because Rolls booked a massive gain on its forex hedging last year. The important thing is that management has stuck to its full-year guidance throughout, despite technical issues with its Trent 7000 engines.

Roland Head reckons the Rolls-Royce share price crush the FTSE 100 this year, as East looks to double its cash flow to £1bn by 2020. Future earnings growth looks strong, so far you can tell given the IFRS15 issue, but it needs to be, with the group trading at 36 times forward earnings, more than double the FTSE 100 average of 15.67.

With new engine orders from Emirates and the Serious Fraud Office recently closing its investigation, the future looks a little smoother.

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

If you’re bullish about the outlook for Rolls-Royce, then this should be good news. You can now buy shares in the same business for 20% less than in August.

Buying at today’s lower price means you’ll get more of the company’s future earnings for each £1 you invest. That means a higher dividend yield and — hopefully — bigger capital gains.

What I’d do

Rolls-Royce’s half-year results showed the group moving back into the black, with an underlying operating profit of £141m on revenue of £7,040m. That only implies an operating margin of 2%, but performance is expected to improve in the second half. Rolls expects to report a full-year operating profit figure of £400m-£500m.

Better still is that chief executive Warren East expects this to be backed by underlying free cash flow of £450m-£550m. That’s good news — cash generation is the ultimate test of any business, in my opinion.

I’m fairly confident of Rolls’ long-term future. What I’ve found harder to understand is how this stock should be valued. It’s a complicated business and makes much of its money from after-sales services, rather than directly from engine sales.

The clarity of the group’s accounting and guidance has improved greatly since Mr East took charge. Based on his track record so far, I’m increasingly happy to rely on the firm’s guidance.

Mr East’s target is to generate £1bn of free cash flow per year by 2020. Looking beyond that, he has a “mid-term ambition” to generate free cash flow of more than £1 per share.

At current levels, these targets put the stock on a 2020 forecast price/free cash flow ratio of 16 and a “mid-term” forecast P/FCF ratio of about 8.7. These figures suggest to me that Rolls-Royce stock could offer good value to long-term investors at current levels.

Better than expected

One of Tuesday’s top risers was FTSE 250 engineering group Meggitt (LSE: MGGT). Shares in the Dorset-based group were up by 6% at the time of writing after it said that sales growth would be stronger than expected this year.

Strong demand for new parts and after-market services from civil aerospace customers and defence clients mean that the company expects to report organic sales growth of 7%-8% for 2018, up from previous guidance of 4%-6%.

Profit outlook improved?

Today’s update didn’t provide any update on profit guidance. But Meggitt did say that its guidance for operating profit margins is expected to be towards the lower end of 17.7%-18%.

This is consistent with previous guidance, so I’d guess that the increase in revenue could mean that profits will be slightly ahead of current market forecasts for earnings of 32.9p per share.

I estimate that Meggitt shares trade on a 2018 forecast price/earnings ratio of 15 after today’s news, with an expected dividend yield of about 3.3%. This looks fair value to me, but the group’s improving performance suggests the stock could continue to climb. Like Rolls-Royce, I see Meggitt as a long-term buy-and-hold stock.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.

Underlying trouble

Presumably they expected worse. That’s understandable, given that the FTSE 250 firm’s share price plunged 12% last time it updated the market in July, when it forecast slightly lower underlying revenue growth than expected. That was despite reiterating its underlying earnings guidance for financial year 2018/19, and stating that its bid pipeline was up £1bn to around £14bn. 

The £3.57bn company also reported an order book and pipeline that remains unchanged at around £32bn (£18bn order book, £14bn pipeline). Around 87% of revenue is now in place for 2018/19 and around 57% for 2019/20, which gives investors a lot of forward visibility.

Second half winner

Management continues to expect low single digit underlying organic revenue growth at constant currency for the full year, with stable margins. Its underlying earnings guidance remains unchanged and revenue and cash flow performance will continue to be second half weighted. Management expects to continue to reduce its debt to an EBITDA ratio of around 1.4 times by the end of the year.

Babcock’s share price trailed down after the initial excitement, or should I say relief, because its investors have endured a rotten time lately, with the stock trading 35% lower than five years ago. Questions continue to be raised about its long-term contract accounting, lack of external board hires and cash conversion, as RBC Capital Markets recently noted, although with a forecast valuation of just 8.2 times earnings, many of these are priced in.

The yield is 4.4%, with cover of 2.8, which is also attractive. Earnings growth projections of 2% and 5% in the next two years may not suggest a shoot-the-lights-out stock, but this is a turnaround play to watch.

On the rebound

The share price of fellow FTSE 250 engineering company Meggitt (LSE: MGGT) has fared slightly better than Babcock’s, although hardly enough to catch the eye. It has jumped 26% in the last six months, helped by last month’s positive interims, which raised full-year organic revenue growth forecasts on better-than-anticipated first-half trading and strong order intake.

The £4.28bn company boosted free cash flow by 19% while cutting debt by 7%, and further pleased investors by lifting its interim dividend 5% to 5.3p. Meggitt specialises in high performance components and sub-systems for the aerospace, defence and energy markets. But trading at a forecast valuation of 16.2 after the recent share price bounce back means it’s no longer in bargain territory. A forecast yield of 3.1% with cover of 2.0 is nothing to complain about, yet nothing to get too excited about either.

Bargain buy

City forecasters reckon the company’s earnings per share could fall 7% this year, then rebound 10% in 2019. However, I can’t get too excited. After Meggitt’s recent share price spurt, it might be worth looking elsewhere. Of the two, I would buy Babcock first. It could just be a bargain.

The post One FTSE 250 growth and income stock I’d buy today and one I’d sell appeared first on The Motley Fool UK.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.

A strong niche player

I think the firm’s operating sector helps it outperform with dividends. Meggitt is an engineering company specialising in high performance components and sub-systems for the aerospace, defence and energy markets serving customers worldwide. The firm is headquartered in the UK and can trace its history back around 160 years during which time it has kept one step ahead of market changes by focusing on what it calls “engineering innovation.” Today, the firm has operating facilities in Asia, Europe and the Americas.

The company has come a long way from its beginnings making aviation instruments for hot air balloons, including the world’s first altimeter. These days the product range is vast, including stuff for aircraft such as wheels, brakes, fire protection systems, sensors and controls and sensors for the military and oil & gas sectors. The firm says most of its products have a common requirement of smart engineering for extreme environments, which needs to deliver “mission- and safety-critical components and sub-systems” capable of performing to exacting requirements.

I reckon the firm’s expertise in its market niche acts as something of an economic moat. There’s a strong aftermarket too, which keeps the incoming cash flowing into the company’s coffers. The firm’s products are often subjected to harsh operating environments, which results in high levels of wear and tear and strong demand for spares and repairs, which all bodes well for the ongoing security of the dividend.

Focusing on attractive markets

Today’s interim results report revealed that orders are up around 12% compared to a year ago. Some 24% of that growth is described as ‘organic’, which excludes the effects of acquisitions, disposals and foreign exchange and therefore suggests the company’s products and services are going down well with customers. Although revenue slipped by 1%, organic growth in revenue came in at 9%, reassuring me that there is a strong business here. Underlying earnings per share eased by 2% but free cash flow increased by 19% and net borrowing fell by 7%. On balance, I reckon the financial indicators that really matter are moving in the right direction. The directors seem to agree because they underlined their confidence in the outlook by once again raising the interim dividend, this time by 5%.

During the period the firm completed three more divestments as part of an ongoing strategy to focus on attractive markets. Some 70% of revenue now comes from operations where Meggitt enjoys “a strong competitive position.” Chief executive Tony Wood said in the report that “trading in the first half was strong, with organic growth accelerating across our civil aftermarket, military and energy end markets.” He reckons revenue will grow between 4% and 6% over the whole of 2018. Meanwhile, today’s share price around 568p throws up a forward dividend yield over 3%, which I reckon is well worth looking into.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt. 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.

In the last three months, the Saga (LSE: SAGA) share price has outperformed the FTSE 100 by around 4%. The over-50s product specialist has become increasingly popular among investors, with the market seemingly pricing in the potential for a successful recovery after a difficult period.

Clearly, there are other stocks that have experienced challenging operational and financial performances in recent periods. Reporting on Monday was one company that may also offer scope to beat the FTSE 100 over the medium term.

Improving outlook

Despite releasing a profit warning towards the end of 2017, Saga’s outlook remains generally positive. Its recent trading update showed that demand for its insurance policies and travel division offerings have been strong. And they could help to drive its overall growth further.

Of course, the company continues to benefit from a strong global economic outlook. Even though Brexit has caused some uncertainty in the UK, encouraging performances from the US and China are expected to continue through 2018 and into 2019. This could lead to continued high demand for the company’s products and services. And with global demographics in its favour (a growing, ageing population) it could enjoy a tailwind over the coming years.

Investment potential

Clearly, Saga’s forecast decline in earnings of 4% in the current year would be a disappointing result. However, it’s expected to return to positive growth next year. And with the stock trading on a price-to-earnings (P/E) ratio of around 10.5, it could offer a wide margin of safety. With the company having made significant investment in its growth opportunities, as well as conducting a refresh of its senior management team in recent months, now could be a good time to buy for the long run.

Recovery prospects

Also offering the potential to outperform the FTSE 100 after a challenging period is aerospace and defence products supplier Meggitt (LSE: MGGT). The company released positive news on Monday, upgrading revenue guidance for the 2018 financial year. It’s experienced strong trading in the second quarter of the year, with good growth delivered in its Civil Aftermarket, Military and Energy segments.

The company now expects organic revenue growth of 4-6% for the full year. This is up from previous guidance of 2-4% and could help to boost its profitability over the coming months. And if trading continues to be positive, further upgrades could be ahead in future quarters.

With the defence sector expected to experience a significant improvement on previous years due to higher military spending in the US, Meggitt could offer growth potential. It trades on a relatively high P/E ratio of 16 at the present time. But with its bottom line expected to grow in 2019, alongside a seemingly solid strategy, the prospects for the business appear to be encouraging for long-term investors.

The post Can Saga’s share price continue to smash the FTSE 100? appeared first on The Motley Fool UK.

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Peter Stephens owns shares of Saga. The Motley Fool UK has recommended Meggitt. 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.