30 Jan 2 cheap growth stocks I’d buy right now
The last time I covered convenience food producer Greencore (LSE: GNC), I concluded that the company was well placed to grow in the defensive, rapidly expanding convenience food market after spending $745m to acquire US-based Peacock Foods.
Unfortunately, since then the stock has gone nowhere, but I believe it’s only a matter of time before the market wakes up to Greencore’s prospects.
Indeed, today the firm announced yet another upbeat trading performance. For the 13 weeks to 29 December, the group recorded revenue growth of 53.6% on a reported basis to £640.5m, including the contribution from Peacock. Pro forma revenue grew by 7.2% in the quarter.
The group expects to book a one-off, non-cash, credit of approximately $28m in its income statement for 2018 thanks to the reduction in the US corporate income tax rate to 21%. The modification requires a revaluation of Greencore’s US deferred tax assets and liabilities as at September 2017. Going forward, the company’s US business will benefit from the lower rate of corporate income tax on future taxable earnings.
Divestment to improve earnings
Greencore also announced today that it had reached an agreement to sell its cakes and desserts business in Hull. The sale of this division was first suggested alongside the group’s full-year results due to the “challenging” trading conditions in the UK cakes and desserts business “characterised by business churn and high levels of inflation.” In other words, this disposal should help improve margins and streamline the business.
City analysts are expecting Greencore to report earnings per share growth of 8% for the year ending 30 September 2018 and 7% for the following fiscal period as it capitalises on opportunities for growth. With earnings expected to grow at a high-single-digit rate, I believe that the stock’s current valuation of 12.2 times forward earnings undervalues the business and its prospects.
Undervalued tech play
Another growth stock that I believe could be too cheap to pass up is ZPG (LSE: ZPG). It owns a number of consumer-focused websites including Zoopla, uSwitch, Money, PrimeLocation and Hometrack and City analysts are predicting explosive growth for the company in the years ahead.
Earnings per share growth of 16% is pencilled in for the year ending 30 September 2018, followed by growth of 15% for the following period. And after the first quarter of the fiscal year, management seems to believe that the company will hit these targets.
Today ZPG issued a trading statement ahead of its AGM, which noted: “The company has had a good start to the financial year across both divisions, with its websites and mobile apps attracting 53m average monthly visits during the period.” The update goes on to say “management remains comfortable with financial year 2018 market expectations.” Unlike almost all other trading updates, the market notification goes on to say: “Collated consensus figures for FY18 Revenue and EBITDA were £310m and £122m, respectively.”
Based on these numbers, shares in ZPG are currently trading at a forward P/E of 19.4, falling to 16.8 for fiscal 2019. While this valuation might look expensive compared to the broader market, its peer Rightmove is currently trading at a forward P/E of 25.2, and the more extensive Software & IT Services Industry is trading at a median P/E of 18.7.
So overall, compared to its peers, and considering the firm’s steady growth rate, I believe ZPG’s shares look cheap.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Greencore. The Motley Fool UK has recommended Rightmove. 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.