Nice little earners ... but Sports Direct should come with a wealth warning

John Harrington takes a look at some ostensibly undervalued companies with consistent records of earnings growth

Sports Direct
Cheap but not especially cheerful

Last week I scoured the London stock market looking for undervalued stocks with a decent record of earnings growth.

READ: Sports Direct and other "nice" little earners

The filter checked for stocks on a price/earnings (PE) ratio of less than 15 with a net asset value (NAV), or book value, no more than 1.5 times its market capitalisation.

Lastly, because companies are sometimes cheap for a reason, I searched for companies demonstrating a record of consistently increasing earnings per share (EPS).

I put that little lot into the pot and came up with six stocks, including a couple of household names.

Here they are, listed in ascending order of price/earnings ratio:

As promised, it is now time to run the rule over each stock to see whether I would consider investing in any of them. As the old saying goes, your mileage may vary.

Sports Direct International PLC (LON:SPD)

Price/earnings ratio: 5.6

Price to NAV: 1.3%

EPS growth last year: 38.6%

Years of EPS growth: 5

I confess this is not a stock I’d dream of considering investing in – and that’s not because my boss is a rabid Newcastle United fan (Sports Direct’s boss Mike Ashley also owns Newcastle United).

The cheap and not especially cheerful sportswear retailer has certainly been a growth story, but judging by its half-year results the growth is about to end when it publishes its results for the year to 30 April.

The consensus forecast is for earnings per share of 16.34p, which would put it on a price/earnings ratio of 19.

All of which saves me the need to press the ‘buy’ button with one hand while holding the nose with the other.

Barratt Developments PLC (LON:BDEV)

Price/earnings ratio: 10.1

Price to NAV: 1.4

EPS growth last year: 22%

Years of EPS growth: 5

Once graced/lumbered (delete according to political preference) with the accolade of being run by Maggie Thatcher’s favourite businessman, the house builder is projected to grow EPS to 56.01p in the year to end-June 2017 from 55.1p the year before.

That’s not sparkling growth, but the stock is still worth considering on a projected price/earnings ratio of 9.9 and the dividend yield – forecast to clock in at around 7% - is a nice bonus.

Barratt operates in a cyclical sector and the sector is possibly due to take a downturn, but an Englishman’s home is not only his castle but also his pension plan these days, and over the long-term it is probably a good sector to be in.

You may, however, prefer …

Telford Homes PLC (LON:TEF)

Price/earnings ratio: 9.5

Price to NAV: 1.5

EPS growth last year: 19.0%

Years of EPS growth: 5

Like Barratt, it builds homes – but not (despite what the name suggests) in Telford. It specialises in building on brownfield sites in London; when it first came to my notice, it was probably the only listed house builder paying any attention to London’s East End, whereas now on my way to work in funky Aldgate I walk past massive developments by the likes of Berkeley and Barratt.

Like those giants of the sector, Telford is building in Aldgate/Stepney as well, but not the sort of “who the heck can afford that?” flats that the big boys are building.

Like Barratt, its forward order book is bulging at the seams, and it offers an attractive dividend – projected at 4.3% - and the only fly in the ointment is that brokers expect the year to end-March 2017 to represent a step back in terms of EPS.

Technically, that should disqualify it from inclusion in any portfolio based on the parameters of this screen, but even with projected EPS of 35.58p (down from 39.3p the year before) the earnings multiple of 10.2 is on a par with Barratt's.

Just next door to the house building sector you will find the property and land development sectors, which is where you will find the next candidate.

Mountview Estates PLC (LON:MTVW)

Price/earnings ratio: 10.6

Price to NAV: 1.3

EPS growth last year: 21.7%

Years of EPS growth: 5

News flow from the property investment company has been virtually non-existent this year, save for an encouraging spot of share buying by chief executive officer (CEO) Duncan Sinclair.

The EPS growth is less important for a property company than the net asset value but is nonetheless impressive, ranging from 12% to 28% over the last four years.

The shares have been becalmed this year and although the CEO buying is a good sign I’d be inclined to wait on the full-year results, due out in June, for a bit more data to go on.

Vertu Motors PLC (LON:VTU)

Price/earnings ratio: 7.9

Price to NAV: 0.8

EPS growth last year: 23.8%

Years of EPS growth: 6

A single digit PE ratio and a market value less than book value certainly make this a stock to look into.

One can only assume that the market has been spooked by the weakness in the market for new cars.

The pre-close trading update at the beginning of March indicated trading performance in the year to the end of February was in line with market expectations, with continued growth in revenues and profits.

Broker forecasts are for profit before tax of £31.32mln, up from £25.96mln, on revenue of £2.73bn, up from 2.42bn.

“Vertu has an excellent team, a strong balance sheet and a proven growth strategy, and as such the board is confident of the group's future prospects," said Robert Forrester, the group’s CEO.

House broker Liberum believes the shares offer the most attractive risk:reward profile in the sector – but then it would say that, wouldn’t it?

“Momentum in the core Aftersales and Used Car divisions (c.70% of gross profit) is impressive and gives us confidence in Vertu's ability to grow profits over the long-term in these resilient and highly fragmented segments,” the broker said, and it makes a convincing case.

Augean PLC (LON:AUG)

Price/earnings ratio: 10.1

Price to NAV: 1.1

EPS growth last year: 21.2%

Years of EPS growth: 6

Hazardous waste management business Augean put in another Herculean performance in 2016, with revenue up 25% year-on-year and underlying profit before tax up 16%.

Net debt increased by £6.5mln to £10.8mln, which is a bit of a concern, but is still less than one year’s underlying earnings (EBITDA).

Exceptional items of £5.7mln, principally relating to a £3.3mln non-cash write-down of its East Kent asset, where the high temperature incinerator has continued to be temperamental, and £1.2mln related to a trade dispute settlement.

The group is perceived to have a dependence on exploration drilling waste management, which is not a good dependency in the current oil & gas environment.

Management says it is diversifying away from this and its record of solid earnings growth suggests it deserves to be given the benefit of the doubt on this score.

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