Today I’m looking at two growth stocks which have both delivered outstanding gains for investors over the last few years.
Recent trading updates suggest that there could be much more to come from both companies. I’ve been taking a look at each of these success stories to find out more.
Strong profit growth
Shares of data analytics and market research company YouGov (LSE: YOU) have risen by 183% over the last two years. The stock bounced 6% higher this morning after the firm issued an upbeat set of half-year results.
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Sales rose by 10% to £56.3m during the six months to January, while operating profit climbed 78% to £4.4m. As profits are rising so much more quickly than sales, we can see that profit margins are improving.
In this case, YouGov reported an operating margin of 7.8% for the first half of this year. This compares to a figure of 4.9% 12 months earlier and 7.1% for the complete 2016/17 financial year.
Stephan Shakespeare, chief executive, says he’s “confident of our expectations for the full year”. Further progress seems likely to me.
I have one concern
Like most companies, YouGov reports figures for adjusted profit and statutory profit. In this case there is a big difference between the two figures. Today’s half-year results show adjusted operating profit of £8.8m and statutory operating profit of £4.4m.
This difference mostly seems to relate to the accounting treatment of software development and acquisition costs. Without getting into too much detail, my view is that the statutory figures provide a more complete view of YouGov’s profitability.
This seems to be supported by the group’s cash flow figures, which show that net cash generated from operating activities was £4.6m during the first half of the current year. That’s broadly in line with statutory operating profit of £4.4m.
However, even if we use adjusted earnings as a guide, YouGov looks expensive to me. The stock trades at a 2018 forecast P/E of 36 and offers a yield of just 0.6%. In my view there’s better value elsewhere.
Up 95% in one year
When I last wrote about posh tonic water firm Fevertree Drinks (LSE: FEVR) in January, I suggested that despite its high price tag, it was “a stock I’d continue to hold”.
What I didn’t expect was that the shares would rise by another 15% in just two months. The shares are now worth 95% more than one year ago.
Recent gains were largely in place even before this month’s full-year results were published. News that Fevertree is now the top mixer brand in the UK off-trade suggests that older rivals may be losing serious chunks of market share to this upstart.
My view
The opportunity to expand into the US market with mixers such as cola looks exciting to me. Although success is likely to be tougher than in the UK, the potential rewards are huge.
However, it’s worth noting that co-founder Charles Rolls sold £82.5m of shares last week. Earnings per share growth are only expected to rise by 10% in 2018 and 16% in 2019. I’m not sure these figures justify a forecast P/E of 65.
The price/earnings growth (PEG) ratio is now 4.3. That’s well above the sub-1.5 level which might indicate good value. If I held the shares, I’d probably reduce my position size in order to lock in some gains.
