Finding a company with defensive qualities is one thing, but finding one with promising near-term earnings’ growth projections right now is quite another.
Strong cash flow, often driven by selling consumable goods with repeat-purchase appeal, is the bedrock of a decent defensive business. If we can pin down such firms and then pick the ones with the most promising growth prospects, we could be on to a winning strategy.
Storming ahead in hospitality
Whitbread (LSE: WTB) expects its earnings to grow 14% for year to February 2015 and a further 14% the year after that. The firm’s progress over recent years is remarkable, powered by its fast-growing hospitality brands, Premier Inn and Costa, which both continue to win market share:
|
Year to February |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Net cash from operations (£m) |
291 |
346 |
322 |
407 |
429 |
|
Adjusted earnings per share |
91p |
112p |
127p |
136p |
168p |
With last month’s half-year results, the firm reported sales up 13%, driving an 18.5% increase in underlying pre-tax profits.
Growth is intact but, this year, the share chart forms a consolidating pattern, which could be presenting investors with an opportunity to hop onto this growth story. At 4345p the forward P/E rating runs at just under 19 for 2016.
Explosive pharmaceuticals
Drug delivery specialist Skypharma (LSE: SKP) delighted us as its share price rose from under 50p during 2013 to today’s 326p.
Did you see it coming? Unless already holding the shares it’s hard for an investor, with an eye on historical trading figures, to detect this kind of explosive share-price growth very early on. Skypharma had been loss making for years and its balance sheet was something of a basket case until fixed by a £112m capital-raising event earlier in 2014. Such dilution can be disastrous for existing investors, but not when sales hit critical mass, as in the case of Skypharma.
Strong evidence suggesting forward potential came with 2013’s half-year results released in August that year. Back then, the firm said its total net loss after tax from continuing operations came in at £1.7m, which compared to a loss of £2.6m the previous year — losses were narrowing and, as we now know, would soon turn into big profits. Yet, at the time of that release, the shares were already up almost 90%.
Maybe it’s still not too late to hop onto Skypharma’s upward trend. The firm expects earnings to grow by 68% during 2015 and the forward P/E rating runs around 12. Having reached a state of profitable trading, the firm’s activities in the pharmaceutical space could prove to be defensive as customers repeat-purchase.
Growing soap
City analysts expect PZ Cussons (LSE: PZC), the FTSE 250 consumer brand company, to grow earnings by 3% during 2015 and by a further 11% in 2016. Brands such as Imperial Leather, Carex, Cussons and Morning Fresh drive the firm’s steady progress and operations extend across Europe, Africa and Asia.
In a September update, the company said trading conditions in most markets remain challenging, but brand renovation and innovation, and a focus on costs should help offset macro-economic challenges, which include foreign exchange and raw material volatility.
At today’s share price of 359p, PZ Cussons trades on a forward P/E rating around 17.5 and there is a forward dividend yield of 2.5%. That’s not cheap, but the shares traded in a range for the last four years and such consolidation may be presenting investors with an opportunity to buy into the story now.
