Many companies in the FTSE 250 mid-cap index have growth potential. But I’d focus on two for deeper research with a view to holding for five years, or longer. Although I don’t have any spare cash to invest right now.
The first is Coats (LSE: COA), the industrial threads company. This month’s full-year results report trumpeted: “10% organic revenue growth, 22% organic adjusted operating profit growth and strong free cash flow”.
Enhanced forward prospects
Chief executive Rajiv Sharma said the company made “excellent” progress transforming its business during 2022. And the acquisitions of Texon and Rhenoflex in the period have strengthened the firm’s position in the attractive footwear market. Sharma reckons the moves increased the medium-term organic growth and margin potential of the business.
And that’s the kind of catalyst I aim to find when choosing investments – something that may drive higher earnings ahead. But on top of that, Coats has been working to improve the efficiency of its operations. And the directors are also focused on bearing down on costs.
Sharma is enthusiastic about the company’s future. He said Coats is well-positioned in its markets with a focus on growing brands. And there’s a pipeline of promising products to keep the pot boiling with growth. So Sharma is “excited” about the firm’s expansion and profit margin opportunities over the medium term.
However, it’s worth noting the stock has made zero overall progress for more than five years. And that could happen into the future if the company’s growth plans stall because of operational challenges.
Nevertheless, City analysts expect earnings to grow by around 5% this year and 20% in 2024. And with the share price near 77p, the forward-looking earnings multiple for next year is around nine. And I see that valuation as fair.
Turning itself around
Meanwhile, the second stock on my list is PZ Cussons (LSE: PZC), the fast-moving consumer goods supplier. The company delivered a steady set of half-year results in February, despite the ongoing challenging general economic environment.
Chief executive Jonathan Myers said the company has more work to do with its transformation programme. And there are some near-term headwinds to navigate in some of firm’s markets. But the directors are “confident” about the opportunities ahead. And the ongoing plan is to build a higher growth, higher margin, simpler and more sustainable business.
City analysts predict a 17% uplift in earnings in 2024 after a decline of about 10% in 2023. And set against those expectations, the forward-looking earnings multiple is running just below 14 with today’s share price near 183p.
That valuation looks fair to me. Although it’s worth being aware that the business has a patchy multi-year earnings record. And earnings may not grow as expected if conditions remain tough.
However, there’s a decent-looking dividend yielding well above 3% to keep shareholders company while they are waiting for growth to materialise.
