While searching for income and value is a sound starting point for all investors, ultimately a company’s growth potential is what really matters. For example, buying a company with a great yield or which has a cheap share price may be a good move, but to generate stunning capital gains that company must also be able to increase its net profit by more than the wider market over a sustained period.
In other words, earnings growth is a major catalyst for share price growth and, in this regard, document storage company Restore (LSE: RST) seems to have huge potential.
For example its share price is up by over 6% today after the company released an upbeat set of results that show a degree of confidence in its future outlook. That is despite pretax profit falling slightly versus the same period of last year as a result of M&A activity, redundancies and other exceptional costs.
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Still, Restore is on target to grow its earnings on an adjusted basis by as much as 25% this year and by a further 13% next year. This puts it on a price to earnings growth (PEG) ratio of just 1.1, which indicates that it offers growth at a very reasonable price. And, best of all, the company’s earnings are relatively resilient and reliable, since document storage has a high degree of customer loyalty, thereby making Restore a great long term growth prospect.
Similarly, luxury fashion brand Burberry (LSE: BRBY) has excellent long term growth potential. Certainly, its sales and profitability may come under pressure in the short run as the Chinese economy continues to make a soft landing. However, the strength of its brand is exceptional and, realistically, Burberry could attempt to further increase its pricing so as to boost sales and margins.
Looking ahead, earnings growth of 10% is being pencilled in for next year. Although this figure was more than double that level in the earlier part of the current decade, Burberry continues to offer market-beating growth even during what is expected to be a difficult trading period for the business. However, with a high degree of customer loyalty, a diverse geographical spread and the potential to expand into new niches, Burberry’s price to earnings (P/E) ratio of 15.8 indicates good value for money.
Similarly, it is the long term growth prospects of Unilever (LSE: ULVR) that hold great appeal. As with Burberry, the short term outlook may not be as positive as previously anticipated, with growth of 9% forecast this year and 6% expected next year. However, with a growing middle class across the developing world, Unilever’s mid to upper-tier price point products are likely to see an increase in demand as individuals seek to use perceived better quality and more expensive items than they have in the past.
And, with Unilever generating around 60% of its revenue from emerging markets, it is well-placed to benefit from a trend which has been present for many decades. So, while the next few years may be somewhat slower in terms of economic growth for the likes of China, the reality is that the consumer economies of the developing world are likely to produce strong growth and push Unilever’s sales and profit much higher.
