The prospect of rising interest rates may also cause returns within the industry to fall, while tax changes could increase the risk of buy-to-let investments over the medium term.

Of course, shares such as BT (LSE: BT.A) have experienced challenging periods. Its market value has declined heavily after what has been a period of lacklustre performance. However, on a risk/reward basis it could offer greater potential than property investment, alongside another falling stock which released a disappointing update on Monday.

Challenging outlook

The company in question is innovative floorcovering specialist Victoria (LSE: VCP). Its trading update showed that challenging market conditions have continued, but that it has enjoyed success in increasing its market share. Although lower margins have been experienced as a result of the company absorbing increases in raw material prices, it’s been able to generate improving like-for-like sales growth in recent months.

Looking ahead, the company is aiming to improve margins. Alongside rising sales, this could lead to a stronger business in the long run. In the short term, though, investor sentiment may continue to deteriorate, with the company’s share price having fallen by 13% following the update.

As such, Victoria appears to be a relatively risky stock to own at present. However, with what seems to be a sound strategy that focuses on its long-term growth prospects, its price-to-earnings (P/E) ratio of 12 could hold appeal for less risk-averse investors.

Turnaround prospects

Also experiencing a falling share price has been BT, with the telecoms giant down by almost 50% from where it traded four years ago. Of course, the last year in particular has seen a number of major changes take place at the business which could have a significant bearing on its future operational and financial performance.

The replacement of its CEO has taken around eight months to complete following the original announcement in June 2018, with Philip Jansen taking on the role at the start of this month. As such, it could be argued that the company has been in an uncertain period in recent months, since its long-term strategy could change during the course of 2019 following a revision to its senior management team.

In terms of its recovery potential, the stock’s P/E ratio of 9 indicates that it may trade at a discount to its intrinsic value. Although its recent results have shown slow levels of top- and bottom-line growth, the company expects the benefits of a transformation plan to become clear over the medium term.

Therefore, there could be an opportunity for a recovery in the BT share price, since its risks appear to be priced in. Over the long run, this could enable it to offer a higher return than other assets, such as buy-to-let properties, due in part to the aforementioned challenges that they face.

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At the beginning of November, the company announced that it was planning to issue €450m of high-yield bonds to refinance some of its existing bank facilities, used to fund a series of acquisitions over the past few years. 

Investors wanted to know why management would want to refinance bank facilities with more expensive high-yield bonds. Rumours began to circulate that the only reason why the company would damage its finances in this way is because management had fallen out with banking partners, which could hint at further problems in the business.

U-turn 

As investors rushed for the hills, the company pulled this bond deal and executive chairman Geoff Wilding pinned the share price collapse primarily on unclear communications. Since then, the business has been in damage-control mode, trying to reassure investors that its balance sheet can support Victoria and the group does have the full support of its banking partners.

Half-year results from the company, which were published today, show net debt at 29 September of £342.7m, representing 3.09x earnings before interest tax depreciation and amortisation (EBITDA). That’s significantly above what I’d be comfortable investing in.

Usually, I overlook any companies with a net-debt-to-EBITDA ratio of more than 2x. The half-year report also says the firm may consider revisiting its bond issuance plan in future “if appropriate.“

So overall, even though the city is expecting Victoria to report earnings per share (EPS) growth of 80% for the current financial year, leaving the stock trading on a relatively attractive PEG ratio of 0.6, I’m not buying because I’m worried about the high level of debt the company has taken on recently to fund acquisitions.

Low-cost dividend 

In my opinion, FTSE 250 building firm, Travis Perkins (LSE: TPK) seems to be a better buy. 

Unlike Victoria, this company isn’t struggling with a large pile of debt. Net gearing was just 17.4% at the end of the last financial period. On top of this, the stock is changing hands for a relatively undemanding 10.4 times forward earnings, and supports a dividend yield of 4.3%, which is comfortably covered 2.3 times by EPS.

Unfortunately, Travis Perkins has lost around a third of its value already in 2018. Investors, it seems, are concerned about the company’s exposure to the UK consumer and the domestic housing market, both of which would suffer significantly in any economic downturn. 

However, so far, group sales have remained robust with like-for-like sales increasing 4.1% during the third quarter. Obviously, at this point in time it’s impossible to tell how the company will fare over the next few years as Brexit unfolds. But I believe that the group’s strong position in the market, coupled with its portfolio of well-known brands, will help it weather any storm and come out the other side in a stronger position than many of its peers.

The post Should I buy this FTSE 250 turnaround after falling 30% in a year? appeared first on The Motley Fool UK.

Each company takes a different approach, but in both cases their shares prices have stumbled recently and have fallen by at least 20% since the start of the year.

“No black holes found”

Buying a company is a bit like buying a house. There’s always a risk you’ll find something nasty after you pick up the keys. Luckily, FTSE 100 turnaround specialist Melrose Industries (LSE: MRO) has plenty of experience looking for skeletons in closets.

In its first set of results since completing the purchase of aerospace and automotive engineering group GKN, Melrose management confirmed its view that “GKN offers an outstanding opportunity”. Performance so far has been in line with expectations and “no black holes” have been found.

The right time to buy?

GKN was already a good engineering business, but its financial performance was often disappointing. Melrose believes it can correct this, improving operating profit margins and selling selected parts of the business.

As outside investors, we don’t have the insight into GKN’s business to understand how easy this will be, or even whether it’s possible.

However, Melrose founders Christopher Miller, Simon Peckham and David Roper have an impressive track record. Between 2005 and early 2018, these turnaround specialists claim to have delivered a total shareholder return of more than 3,000%.

Analysts’ forecasts put Melrose stock on a forecast P/E of 14.9 with a dividend yield of 2.5% for the current year. Earnings are expected to rise by 22% next year, as improvements to GKN’s operations start to deliver results.

In my view, this could be a good long-term buying opportunity.

A tricky situation?

Another executive who’s built a loyal following by delivering stunning shareholder returns is Geoff Wilding, executive chairman of flooring group Victoria (LSE: VCP).

Mr Wilding’s ‘buy and build’ strategy of repeated acquisitions has seen the Victoria share price rise by more than 1,000% over the last six years. Sales of flooring and carpets have risen from £71m in 2014 to £425m last year.

This strong momentum is expected to continue. Sales for the year ending 31 March 2019 are expected to rise by 40% to £599m, while adjusted earnings are expected to climb 34% to 42.1p per share.

All of this sounds great. So why have the firm’s shares fallen by 40% since the start of September?

Things to worry about

At the end of October, Victoria said that profit margins would be 1%-1.5% lower than market forecasts. City analysts appear to have interpreted this as a profit warning. Consensus earnings forecasts for the current year have now been cut by 12%.

Another concern is that the group’s debt levels have now reached what I see as quite high. Using figures from the firm’s latest accounts, my sums suggest net borrowings of about £340m.

That represents almost 3.4 times the firm’s pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) of £104m. That’s well above my preferred limit of 2x EBITDA.

I don’t see an immediate risk here, as the firm remains profitable and cash generative. But I think debt reduction needs to be a priority. In the meantime, my view is that Victoria’s forecast P/E of 11.6 is probably high enough. This isn’t for me at the moment.

The post Have £2,000 to invest? Why I think this FTSE 100 growth stock could be a bargain after 30% drop appeared first on The Motley Fool UK.

Looking ahead, further outperformance of the FTSE 100 could be ahead. As such, now could be the right time to buy into the BP share price alongside another cheap stock which reported positive results on Monday.

Bright future

The company in question is designer, manufacturer and distributor of innovative flooring Victoria (LSE: VCP). The company released an upbeat trading update for the five months to the end of August, with like-for-like (LFL) revenue rising by more than 3%. It’s been able to use competitive product positioning to drive volume and market share growth in the UK, with new product ranges across the company set to be launched during the second half of the year.

With the recent acquisition of Ceramica Saloni performing as expected and synergies being delivered, the prospects for the company appear to be encouraging. It’s working on further acquisitions which could help it to deliver further growth over the medium term.

Despite its strong performance and improving outlook, Victoria trades on a price-to-earnings growth (PEG) ratio of just 1.2. It has a robust outlook, with double-digit earnings growth expected in the current year and next year. As such, now could be the right time to buy it.

Improving prospects

The BP share price could also deliver high capital returns in future. The company’s financial performance has already been boosted by a higher oil price, and further growth could be ahead. The company has invested in new projects in recent quarters, while also engaging in M&A activity following the purchase of BHP Billiton’s petroleum business unit. Forecasts for the oil price remain encouraging, with demand expected to remain robust and supply continuing to lag behind due to political risks among various OPEC members.

With BP’s asset base and balance sheet steadily improving as the oil price has moved higher, the prospects for the company’s Downstream and Upstream operations seem to be encouraging. Its recent updates have shown that both segments could enjoy an improved financial and operational outlook, and this could have a positive impact on the company’s share price.

With BP forecast to post a rise in earnings of 11% in the next financial year, it trades on a PEG ratio of 1.1. For a FTSE 100 major with a diversified asset base and a dividend yield of over 5% to have such a low valuation suggests that it could offer significant investment appeal. As such, now could be the right time to buy it ahead of what may prove to be a purple patch for the oil price and the wider oil and gas industry.

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Based on recent numbers, there could be more upside ahead.

July’s results for the 12 months to the end of March revealed a “fifth consecutive year of strong growth” with revenue jumping 29% to £424.8m. Underlying pre-tax profit also rose 39% to a little under £41m. All this came despite the sharp increase in expenditure (from £2.5m to £11.2m) as a result of European acquisitions Ceramiche Serra and Kerben Grupo. Another acquisition — Saloni — was announced earlier this month.

With executive chairman Geoff Wilding stating that the company had already experienced “a very good start to the year,” it’s likely that relatively new holders of Victoria’s stock could still make decent money. According to Wilding, there remains “an enormous market opportunity” for the company in the both the UK and abroad. 

Whether all this is sufficient to bump the stock to the top of wishlists, however, is debatable.  

On almost 18 times earnings for the current year, Victoria isn’t ridiculously overpriced but it’s certainly not cheap for the sector in which it operates. Befitting its growth credentials, there’s no dividend to speak of and, at £258.7m back in March, there’s a whole lot more debt on the balance sheet now than there used to be (although the company was keen to state that this is less than 2.7 times annualised EBITDA).

If either the valuation or the lack of income bothers you, there’s another option.

Heading the other way…

While unlikely to give you the sort of returns previously generated by Victoria, I think mid-cap peer Headlam (LSE: HEAD) could still be a decent long-term investment. That’s if you’re prepared to look beyond the recent slump in its share price and a cautious near-term trading outlook.

True, today’s interim results for the six months to 30 June certainly weren’t warmly received by the market. It’s not hard to see why.

Total revenue rose by just 1% to £337.5m. In the UK, like-for-like revenue growth declined 5.2% — a concerning result considering that the firm still derives the vast proportion of its business from these shores.

Although underlying pre-tax profit of £17.7m was supported by new acquisitions, Headlam believes that “softness in the UK market” will continue for the rest of 2018. As a result, CEO Steve Wilson speculated that full-year numbers will now be “towards the lower end of current market expectations” (albeit an improvement on 2017). Price increases — scheduled for the beginning of September as a result of a rise in the cost of raw materials — are unlikely to help matters. 

Trading on 10 times forecast earnings, it seems logical that Headlam will appeal to value-focused investors. With a total payout of 26p per share expected by analysts before today — equating to a cracking 5.8% yield — you could argue that any prospective purchasers will also be adequately compensated should the shares fall further. A net cash balance of £16m at the end of June is another positive.

The question, however, is whether you trust yourself not to panic before things recover.

The post This ‘boring’ growth stock has turned £1,000 into almost £50,000 in just 5 years appeared first on The Motley Fool UK.

These fantastic shareholder gains have been driven by Wilding’s ambitious roll-up acquisition business model that has seen it go from a relatively minor player in the sector to a near billion-pound business with operations in the UK, Australia and Europe.

Looking at the company’s results for the year to March that were released this morning illustrates just how effective this model has been. Revenue for the year grew 29% to £424.8m while underlying operating profits leapt 45% to £48.8m. Much of this growth was driven by acquisitions but the group has also consistently laid down solid organic growth by bundling different flooring products together and offering stores more competitive prices that it can afford due to increased scale.

Over the long term, there’s still plenty of potential growth for Victoria as it executes its proven roll-up model in the massive European flooring market and branches out into other types of flooring such as ceramic tiles.

And as the company buys up smaller competitors it has shown it can significantly improve margins over time through increased purchasing power with suppliers, consolidation of back office and manufacturing functions, and improved scale in warehousing and distribution of its products.  

Now, Victoria is not cheap with its shares trading at a premium valuation of 26 times trailing earnings. Furthermore, with net debt up to 2.68 times EBITDA following this year’s big acquisitions, the company will likely spend the next year deleveraging the balance sheet rather than making splashy purchases. However, with a great business model and plenty of growth opportunities in front of it, I still find Victoria an attractive buy-and-hold growth stock.

Succeeding while other retailers fail

The same is true of discount retailer B&M (LSE: BME), which trades at a 19.9 times forward earnings thanks to investors being impressed by the company’s growth strategy.

It’s true this is a lofty valuation compared to other retailers, but I also believe it’s warranted in the case of B&M. That’s because where other retailers are struggling, it is finding great success by opening new stores and driving increased like-for-like (LFL) sales at existing locations, thanks to unbeatable prices on a range of household goods and groceries.

Weak consumer confidence and dismal wage growth have led a broad swathe of the UK public to shop more frequently at both discount grocers and general stores. This trend helped drive the group’s sales up 21.4% in Q1 thanks to new store openings, the acquisition of the Heron Foods discount grocer, and a 1.6% uptick in LFL sales from B&M outlets.

In the years ahead I expect growth to continue at a low double-digit clip as the group opens around 50 new B&M stores annually, expands the presence of Heron in the UK and general discounter Jawoll in Germany, and uses its increased purchasing power and customer knowledge to drive further LFL sales growth.

With all these positive characteristics alongside sector-leading EBITDA margins of 9.4%, sustainable net debt of only 1.9 times EBITDA and a fast rising 1.72% dividend yield, I’m happy to own my B&M shares for a very long time.  

The post Why I’d still buy this stock that’s turned £1,000 into over £50,000 in under six years appeared first on The Motley Fool UK.

However, this means that the stock now appears to offer better value for money than it did 12 months ago. As a result, it could be worthy of a closer look alongside another growth stock which seems to offer a wide margin of safety.

Improving outlook

The performance of Rolls-Royce in the last five years has been very mixed. The company has recorded earnings growth in just two of those years, with its strategy having evolved during that time to provide a brighter growth outlook.

For example, it has conducted a rationalisation of its asset base. This has helped to provide greater efficiency and a stronger focus on its core operations. It’s also invested in new products, while seeking to make its business simpler. Efficiency gains from cost reductions also seem to be having a positive impact on its financial prospects within what continues to be a relatively mixed operating environment.

Investment potential

With Rolls-Royce increasing its earnings by 34% in the previous financial year, it seems to be making progress with its turnaround programme. It currently trades on a price-to-earnings growth (PEG) ratio of 0.3, which suggests that it offers a wide margin of safety.

Certainly, the prospects for the world economy remain uncertain. However, with defence spending set to increase across the developed world, trading conditions for the company may improve to some degree. And with what seems to be an evolving strategy, its growth potential means it could merit a higher valuation than at the present time.

Impressive outlook

Also offering the potential for improving profitability over the medium term is designer, manufacturer and distributor of innovative flooring, Victoria (LSE: VCP). The company announced on Wednesday that it plans to improve the efficiency of its underlay manufacturing process in Australia by closing one of its two plants. This comes after the rationalisation of its UK manufacturing footprint, which has thus far been successful.

The company has also announced that trading in the first two months of its financial year has been impressive. Like-for-like (LFL) sales have moved 3% higher, which suggests that the business is on track to deliver on its financial outlook.

With Victoria trading on a PEG ratio of 0.4, it seems to offer good value for money. Although the company is experiencing a period of major change as it seeks to deliver on its post-acquisition reorganisation, its long-term prospects appear to be bright. As a result, it could deliver strong share price growth performance, with a wide margin of safety suggesting that now may be a good time to buy it.

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Was I right? Well, the shares have since fallen by nearly 10% amid a wider market sell-off. But they rose on Wednesday after the company said that its full-year results should be ahead of expectations.

This revised guidance applies to the year ended 31 March. It means that for the fifth consecutive year, the performance will beat analysts’ forecasts.

Should you buy?

This company shows how value can be created for shareholders with a successful buy-and-build strategy. A rare combination of strong management, good timing and attractively-priced acquisitions has enabled Mr Wilding to transform the firm from a sleepy manufacturer into an £870m growth business.

Importantly, this has been done without high levels of debt. The group’s last-reported net debt of £98.6m only represented 1.8 times earnings before interest, tax, depreciation and amortisation (EBITDA). That looks reasonable to me given that profits are still growing strongly.

By manufacturing and distributing floorcoverings, Victoria avoids the risk of running retail stores and has achieved a high level of geographic diversity. Nearly 60% of earnings are now generated outside of the UK.

Management has advised shareholders to expect “further acquisition-led growth focused on Europe” and analysts expect earnings to rise by a further 50% during the 2018/19 year. With the shares trading on just 16 times 2018/19 forecast earnings, I believe this remains a growth buy.

A dividend-growth choice?

One thing Victoria lacks is a dividend. Mr Wilding’s focus is on reinvesting cash in further growth. So far this approach has been successful, but if you need an income from your shares, you might be tempted to consider UK-focused DFS Furniture (LSE: DFS).

This group, which owns brands including DFS, Sofa Workshop and Sofology, trades on a modest P/E of 10 and offers a forecast yield of 6.2%.

Be careful

However, I believe there are good reasons for this cheap valuation. Retailers like DFS often have a high proportion of fixed costs, which stay the same regardless of sales. This leads to a high level of operational gearing, which means that a small change in sales generates a larger change in profit.

That seems to be happening here. Sales excluding acquisitions fell by 3.5% to £366.5m during the half year to 27 January. But underlying EBITDA before acquisitions fell by 7.4% to £30m over the same period.

What’s going on?

DFS says that it’s facing “challenging market conditions”. The group expects to deliver an improved performance during the second half, helped by the recent acquisition of Sofology. My concern is that the balance sheet looks weak to me.

Current liabilities of £245.4m are more than double current assets of £114.3m. The group also has borrowings of £185.6m. This situation is sustainable while sales remain stable and customer deposits continue to flow. But if sales dry up at any point, I believe this business could rapidly run out of cash.

In my view, the DFS dividend is too generous and should be cut to speed up debt repayments. As things stand, there’s not enough margin of safety for me to want to invest here.

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And even though the company’s stock has risen more than 75% over the past year, I think more astounding growth could be on the way as the group sets its sights on the massive European market. Its latest two acquisitions there total €274.1m and not only broaden the group’s exposure to new regions, but also marked its first foray into ceramic flooring, a huge market in its own right.

Even before these two high-margin acquisitions, revenue has been growing quickly with sales up a whopping 24% year-on-year in the half year to September. Much of this growth came from acquisitions but I estimate organic growth of around 4% was recorded in the period, which is very, very good.

With growth accelerating and a stellar history of consistently improving margins and cash flow across the business, I think Victoria is setting itself up for another great year.

You’ve got mail 

Also on my list is digital marketing software provider dotDigital (LSE: DOTD). The company’s share price has leapt by 50% in the past year as its dotmailer e-mail and multi-channel marketing tool has caught on with clients looking for effective, easy-to-use automated methods to stay in contact with prospective and current customers.

With a highly effective, but low-cost, core product, dotDigital has had few problems finding clients ranging from small businesses to FTSE 350 firms. In the half year to December, revenue was up 25% to £18.8m due to a small bolt-on acquisition and impressive organic expansion of 17%.

And unlike many small firms that are growing rapidly but lose loads of money, dotDigital is profitable and has a large cash position. This is in large part due to the fact that over 80% of its revenue is highly profitable recurring sales from existing clients. In 2017 this led to EBITDA margins hitting 31.5% and net cash rising to £20.4m, although a recent £11m acquisition will dent this figure.

With a great product in a fast growing market, cash on hand and proven profitability, I think dotDigital is attractively priced even at 30 times full year 2018 earnings.

To infinity and beyond 

A more out-of-this world option I’ve got my eye on is Gooch & Housego (LSE: GHH), which is an expert in designing high-quality optical components for end markets ranging from space agencies to health imaging and a wide variety of industrial applications.

In the year to September the group’s revenue jumped 18.7% on a constant currency basis to £112m due to organic growth and a small acquisition. This growth was driven by particularly strong demand and management is investing heavily in both R&D and acquisitions to support what are expected to be years of strong growth.

And in the meantime the business is still strongly profitable with adjusted pre-tax profits hitting £16.1m last year and its net cash position rising to £14.9m at year-end. While Gooch & Hosuego isn’t cheap at 26 times forward earnings, the group’s strong competitive position and high growth prospects make it very attractive to me.

The post 3 promising stocks I’d buy in 2018 appeared first on The Motley Fool UK.

These aren’t lossmaking ‘jam tomorrow’ stocks. They’re profitable and well-financed businesses with good long-term prospects.

It’s no game

Competitive ‘esports’ represent the glamourous side of the video game industry. But behind the scenes, a lot of technical work is required to allow games producers to sell and support popular games around the world.

AIM-listed Keyword Studios (LSE: KWS) is an increasingly big player in this growing niche, providing services such as localisation, voiceover and functional testing.

The company’s shares rose by 8% this morning after it said that revenue and adjusted pre-tax profit for the year ending 31 December should be “comfortably ahead” of market forecasts.

Today’s gain means that Keyword’s share price has risen by 173% over the last year, lifting its market cap to £987m. It’s now the 14th-largest stock on the AIM market.

This could go higher

Consensus forecasts before today suggested that the group’s adjusted earnings would rise by 40% to €0.29 per share this year. Today’s announcement suggests to me that a figure of €0.32-€0.34 is more likely, giving one-year profit growth of perhaps 60%.

Much of the group’s breakneck growth has been achieved through acquisitions, but cash generation and profit margins have remained strong and the group has very little debt. Keyword also issued £75m of new shares in October, providing dry powder for further deals.

The stock’s 2018 forecast P/E of 40 may seem expensive, but I believe a more meaningful measure is the PEG (P/E growth) ratio, which at 1.26 seems quite reasonable to me. I think further gains are possible.

This is how you do it

Like Keyword Studios, Victoria (LSE: VCP) has a market cap just short of £1bn and is listed on the AIM market. The similarities don’t end there. Both companies have expanded quickly and successfully through a well-executed series of acquisitions.

Victoria’s focus on floor coverings such as carpets and tiles may be a million miles away from video games. But the result for shareholders is not. The shares have risen by 130% since the start of 2017 and by well over 1,000% since Executive Chairman Geoff Wilding took charge in 2012.

The group’s momentum appears to remain strong. In an update last week, management reported “very good levels of trading” in the December quarter.

Victoria’s adjusted earnings are expected to rise by 17% to 29.8p per share this year. This is below the firm’s average earnings growth of 36% per year since 2012, but analysts expect this relatively modest result to be no more than a brief pause.

Broker consensus forecasts indicate that earnings are expected to climb by 56% to 46.5p per share in 2018/19, as the full benefit of recent acquisitions reaches Victoria’s bottom line.

These forecasts place the stock on a forecast P/E of 18 for the year ahead. I believe this could still be a reasonable price for such a successful company. If I owned the shares, I’d definitely hold on for more.

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