Shares in plastic piping specialist Polypipe (LSE: PLP) have risen by as much as 7% today after the company announced the acquisition of ventilation systems manufacturer, Nuaire, for £145m. The deal will be fully paid for in cash, with Polypipe utilising existing cash balances on its balance sheet as well as new debt to fund the deal.
Clearly, the market has warmly received the news and, with Nuaire expanding Polypipe’s product platform and market reach within the growing ventilation sector, it seems to make sense for the company’s long term growth outlook. Furthermore, Nuaire posted a rise in revenue of 18.8% in its last full financial year, as well as an increase in operating profit of 29.4%, and so it is likely to make a positive contribution to Polypipe’s financial numbers in the short to medium term.
Looking ahead, Polypipe appears to have huge capital gain potential even though its shares have already risen by 28% since the turn of the year. That’s because it is expected to grow its bottom line by 13% this year, followed by further growth of 16% next year. Such a strong growth rate is likely to positively catalyse investor sentiment in the company and, with Polypipe’s shares trading on a price to earnings growth (PEG) ratio of just 0.9, they appear to offer excellent value for money.
In fact, when compared to consumer goods company Reckitt Benckiser (LSE: RB), the difference in growth prospects over the medium term is staggering. For example, Reckitt Benckiser is expected to grow its bottom line by just 3% this year and by a further 7% next year. Although these are not particularly low numbers, Reckitt Benckiser’s PEG ratio of 3.4 indicates that its shares are overvalued at the present time.
Certainly, it is an excellent business with huge long term growth potential across the developing world. However, much of this appears to be more than adequately priced in. As such, Reckitt Benckiser appears to be worth adding to a watch list until such time as its shares offer more appealing value for money.
Meanwhile, BT (LSE: BT-A) also lacks value at the present time, with its shares trading on a PEG ratio of 2.7 as a result of growth of just 1.9% being forecast over the next two years. And, while the company is enduring a transitional period that could increase its dominance of the quad play market (and lead to higher margins in the long run), the nearer term outlook for the business appears to be very challenging. As well as a high (and increasing) level of competition, BT is also investing heavily in sports rights and in attempting to win customers, both of which are set to hurt its profitability in the current year.
So, while Polypipe appears to be well-worth buying at the moment and Reckitt Benckiser is worth keeping an eye on in case its price becomes more appealing, BT seems to be a stock to avoid.
