About a third of FTSE 100 companies are forecast to post a decline in earnings in their current financial years and a further quarter are forecast to report growth of less than 6%. As such, higher-growth stocks are relatively thin on the ground at the present time and are much prized by investors. I believe the share prices of many of these have now been bid up too high and that there’s something of a shortage of growth at a reasonable price in the top index.
Today, I’m discussing one Footsie favourite, whose valuation I see as unappealing, and a smaller company I see as offering growth at a reasonable price, as well as a 4% dividend yield.
Rightmove wrong price
The UK’s number one property portal and FTSE 100 company Rightmove (LSE: RMV) is a terrific business, in my view. Itms dominance, profit margins and return on capital employed rightly merit a premium valuation. And it’s certainly delivered in spades for past investors: an average annual total return of more than 35% over the last 10 years compared with less than 8% for the Footsie.
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At a current share price of around 5,150p, Rightmove’s market capitalisation is £4.7bn. As a UK-focused business it’s grown into a very large fish in a relatively small pond. Earnings growth is on a decelerating trajectory: 24% (2014), 21% (2015), 18% (2016) and 14% (2017). Analysts are forecasting a further decline in growth to 9% this year. I believe it may be able to maintain this growth rate in future years — or at least until the next serious economic downturn.
The current-year forecast price-to-earnings (P/E) ratio is 29. At the forecast earnings growth rate of 9%, the price-to-earnings growth (PEG) ratio is 3.2. This is way above the PEG ‘fair value’ marker of 1, so I believe the P/E is currently far too high for the level of earnings growth on offer. And with a 1.3% dividend yield also being relatively meagre, I rate the stock a ‘sell’.
Sound value credentials
I’m far more attracted to the value proposition over at specialist staffing business SThree (LSE: STHR) which released its half-year results today. The shares are trading a tad up at 350p, valuing this FTSE SmallCap firm at £455m.
The group specialises in the science, technology, engineering and mathematics sectors and I like its geographical diversification. Over 80% of its gross profit comes from outside the UK and Ireland. Today it reported an 11% year-on-year increase in gross profit across the group for the six months to 31 May, with a strong performance in Continental Europe (up 18%) and the USA (up 9%) more than offsetting a challenging UK and Ireland (down 2%).
Management said the positive group trading trend has continued since the period end. City analysts are forecasting 7% earnings growth for the current year ending 30 November, accelerating to 16% for fiscal 2019. This gives a P/E of 12.7, falling to 10.9 and a PEG of 1.8, falling to 0.7 — so moving to the value side of the PEG fair value marker of 1. With SThree also offering a forecast dividend yield of 4% this year, rising to 4.25% next year, I believe the company has sound value credentials and I rate the stock a ‘buy’.
