Finding growth stocks is becoming more and more challenging. As global economic growth slows, corporate profitability is weakening too. Many stocks have already reported earnings declines and more will likely do so in the coming months. But, as growth becomes more scarce, investors should become more willing to reward those companies with higher valuation multiples.
Here are three growth and income stocks that I find reasonably priced:
Making great strides
Despite the slowdown in emerging markets, Unilever (LSE: ULVR) continues to report steady growth in revenues and earnings. Underlying earnings per share (EPS) grew by 14% in 2015, thanks to continued innovations and the pricing power of its well-recognized labels such as Knorr, Lipton, Dove and Lynx.
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Looking forward, the company faces a number of headwinds. Most notable of these are weakening consumer confidence in emerging markets, volatile currency movements and rising competition from smaller brands.
However, the effects of these headwinds should be more than offset by stronger tailwinds. Rising consumer spending in North America is supportive of further volume growth, whilst lower commodity prices will likely accelerate Unilever’s cost optimization plans and boost operating margins. In addition, Unilever is making great strides in expanding its presence in the growing premium end of the personal care market.
The outlook for earnings growth is positive. Underlying EPS is forecast to grow another 4% this year, giving it a forward P/E of 21.0. This puts it at a slight discount to its historical forward P/E of 22.0, and on top of this, shares in the company carry a reasonable dividend yield of 3%.
Great track record
Self-storage REIT Big Yellow Group (LSE: BYG) has a great track record in delivering robust earnings and net asset value (NAV) growth. Over the past five years, underlying EPS has more than doubled, having risen 109%, whilst NAV (with dividends included) has expanded 28%.
Big Yellow’s shares currently trade at a 38% premium to NAV, but this expensive valuation seems justified because of the REIT’s relatively stronger growth prospects. Management expects earnings to double again by 2022, thanks to rising demand across the UK and limited supply growth over the medium term.
This should be made possible by rising occupancy rates, which drives up margins, too. The fixed-cost nature of operating self-storage facilities means increasing occupancy does little to drive up operating costs, allowing much of the revenues to pass through to its profits. And, this combination of top-line and bottom-line growth helps earnings to grow much faster than revenues.
Strong demand
Airline group International Consolidated Airlines (LSE: IAG) benefits from a combination of favourable tailwinds. Passenger numbers are growing at a high single-digit rate, and strong demand for its long haul destinations is set to give its profitability a sizeable lift. City analysts expect underlying earnings to have grown by 73% in 2015, giving its shares an estimated P/E of 8.6.
Looking forward, lower fuel costs will continue boost margins, as the airline’s hedging activities delays the benefit of lower prices on its bottom-line. Underlying EPS is set to grow by another 42% this year, which lowers its forward P/E ratio to just 6.1.
IAG seems like a good pick for income investors too, who can look forward to the prospective dividend yield of 5.0% this year.
