In contrast, the FTSE 250 has gained 43.3% (or 7.5% per annum) during the same time period. As such, hunting for mid-cap growth shares could be a shrewd move for long-term investors. With that in mind, here is an impressive growth stock which reported sound results on Wednesday.

Improving outlook

The company in question is reinforced polymer technology specialist Fenner (LSE: FENR). The company’s half-year results showed progress across the business, with underlying profit before tax rising by 96%. On a per share basis, underlying profit gained 90%, while the company was able to reduce net debt by £27m to £75m during the period. This should provide a lower-risk outlook for the business in what may prove to be an uncertain period in many of its key markets.

Looking ahead, Fenner is forecast to deliver earnings growth of 26% in the current year, followed by further growth of 21% next year. Despite such strong growth rates, it trades on a relatively modest valuation. It has a price-to-earnings growth (PEG) ratio of just 1.2, which suggests that it offers a wide margin of safety.

While in the last five years the company has experienced a difficult period, it now seems to have a solid strategy which could catalyse its share price performance. As such, now could be the perfect time to buy it ahead of a period of improving financial performance.

Bright future

Also offering high growth prospects within the FTSE 250 is JD Sports Fashion (LSE: JD). The clothing retailer has experienced a strong period of growth in recent years despite a challenging period for UK consumers. It has been able to grow its bottom line at a double-digit pace in the last three years, with an international growth strategy now starting to take shape.

Looking ahead, JD is expected to report a rise in earnings of 3% in the current year, followed by further growth of 10% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.6, which suggests that it offers a wide margin of safety.

Although the past year has been a difficult period for UK consumers, trading conditions may improve in future months. Inflation has now fallen below wage growth, and this could prompt higher spending among consumers who now have rising disposable incomes in real terms.

While Brexit may cause some uncertainty over the medium term, the performance of the UK economy continues to be robust. As such, buying JD could be a shrewd move – especially since it continues to diversify away from the UK and offers an improving risk/reward ratio.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today I’m looking at two highly-rated engineering stocks whose recent performance suggests they could continue to climb. Stocks like these can be ideal choices for your ISA as future capital gains and dividends will be tax-free.

Steaming gains

Shares of FTSE 250 group Spirax-Sarco Engineering (LSE: SPX) rose by 3% this morning after the company said that its adjusted pre-tax profit rose by 29% to £229.1m in 2017.

This 130-year old firm produces industrial steam systems and a variety of other specialist products. Sales rose by 32% to £998.7m last year, thanks to a mix of organic growth, acquisitions and favourable exchange rate movements. Shareholders will receive a total dividend of 87.5p, an inflation-beating 15% increase on 2016.

Why I’d buy

Today’s figures show that the firm’s underlying trading margin rose by 0.9% to 24.7% last year, while its adjusted return on capital employed rose from 47.9% to 52.9%. These high figures drive the group’s strong cash generation. They mean that it’s able to expand continuously without needing much debt.

Such high profit margins also suggest to me that the firm’s products have a competitive advantage, perhaps because their specialist nature means that competition is limited.

The shares do look expensive, with a 2018 forecast P/E of 25 and a dividend yield of just 1.6%. But analysts expect earnings to rise by 11% this year. I believe it would be premature to call the top on this stock just yet.

I sold too soon

I invested in reinforced polymer engineering group Fenner (LSE: FENR) just before the mining slump hit rock bottom. This company produces heavy duty conveyor belts for mines and a variety of polymer products for the oil, gas and medical sectors.

My shares performed well during the first part of the mining sector recovery, but I sold for a modest profit much too soon. Had I held on, I’d now be sitting on a 120% profit at current prices.

My mistake was selling when the shares started to look expensive. I focused too much on past performance, not on the potential success of the group’s turnaround strategy. This has been impressive.

Strong momentum

The group’s operating margin reached 8.1% last year, but it’s been above 10% in the past. I suspect this year will see another increase.

January’s trading update revealed that results for the year to 31 August are expected to be ahead of forecasts. Analysts now expect the firm to report adjusted earnings of 22.2p per share this year, a 25% increase from last year. Fenner’s dividend is expected to rise by 20% to 5p.

The group’s earnings should rise by a further 20% in 2018/19, giving the stock a price/earnings growth ratio of 1.2. That still looks affordable to me, despite the P/E ratio of 21.

Fenner would be my pick of the two shares I’ve looked at today. I’d continue to hold and would consider buying more.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The company makes products targeting high value-added solutions using polymeric materials for the oil and gas and other industries. It also has a big business making engineered conveyer systems for the mining, industrial and bulk handling markets. Trading has been brisk and the firm is reporting revenue up 14% compared to last year, underlying earnings per share rocketing up 111% and a 78% bolstering of free cash flow. Those numbers form a sound foundation for the dividend and the directors took the opportunity to push the full-year payment up by a satisfying 40% — well played, Fenner!

Sustainable growth

Times have been challenging in for the firm recent years and we’ve become used to seeing hefty decreases in annual earnings, but the directors think today’s “significantly improved results” mark a move from recovery towards sustainable growth. If you cling to fears that the macroeconomic landscape might be deteriorating, that view is at odds with the outlook statements that firms such as Fenner are posting lately. Chief Executive Mark Abrahams says that “as we enter the new year, the outlook is strengthening.”

Of course, we live in a politically and economically uncertain world, but I’m encouraged by Fenner’s progress and delighted that the directors now expect next year’s trading to come in “above its previous expectations,” a phrase that’s music to the ears of investors far and wide. At a share price near 364p, Fenner trades on a forward price-to-earnings (P/E) ratio of almost 19 for the current trading year to August 2018, not cheap, but fair for a company performing so well. I think the firm is well worth your further research and the stock could make for a more comfortable hold than, for example, Fevertree Drinks (LSE: FEVR), which has a stratospheric valuation.

More to come?

The share price of the premium mixer drinks manufacturer has eased back from the 2,500p or so it hit in September, but even today’s 1,918p throws up a forward P/E ratio just over 48 for 2018, which makes me nervous. City analysts following the firm expect earnings to move up just 4% during 2018, which is well short of the hefty increases we’ve seen over the past few years.

Fevertree remains a fabulous growth story and has the opportunity to further consolidate its market position in this country while expanding rapidly abroad, which could ignite the share price down the line. However, the rate of earnings growth is taking a breather and I fear that the level of valuation may take a breather as well. To me, this one of those occasions when it could pay to think of the prospects of the underlying business separately from the prospects of the stock. I have no doubt that the stock will go on to present us with another compelling investment opportunity, but for now, I’m watching from the sidelines. I’d like to see Fevertree’s stock decline further or trade sideways for a while, but I’m sure the firm could sit comfortably in my portfolio alongside Fenner in the end.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It seems as if there could be further gains on the horizon as well. Shares in the company are trading higher by 10% at the time of writing following yet another bullish trading update. 

Specifically, management revealed today that, “trading across the Group remains positive and, on the basis of the improved outlook, most notably in the medical businesses, the Board anticipates that the Group’s operating profit for the financial year ending 31 August 2017 will be comfortably ahead of its previous expectations.” Going forward, the company will also benefit from a reduced interest charge as during the period the group repaid $90m of 5.8% loan notes from cash deposits. 

Earnings upgrades 

Before today’s update, City analysts had been expecting Fenner to report earnings per share of 14.7p for the fiscal year ending 31 August 2017, on a pre-tax profit of £37.4m, but it now looks as if this forecast is out of date and the company is going to surpass city expectations. This bodes well for future growth. Analysts had been predicting earnings per share growth of 18% the fiscal year ending 31 August 2018, and it now looks as if this projection might be revised higher. Based on these projections, shares in Fenner currently look cheap compared to the growth the company is generating. 

Considering City forecasts, which we now know are out of date, and after today’s gains, the shares are trading at a forward P/E of 21.8, falling to 18.3 for the following fiscal year. A forward earnings multiple of 18.3 divided by earnings growth of 18% or more gives a PEG ratio of less than one, which signals the shares offer growth at a reasonable price.

Steady grind higher 

Over the past five years, shares in Relx (LSE: REL) have smashed the FTSE 100, producing a return of 218% excluding dividends, compared to the UK’s leading index return of 29.3%. These gains have come as the company has nearly doubled its earnings per share from 49.4p for 2012 to an estimated 81.2p for 2017. 

Compared to the market’s fast-growing internet businesses, Relx is not the market’s best growth stock. Nonetheless, the most attractive quality about the company is its predictable growth. Every year the business has managed to chalk up steady, high single-digit or double-digit earnings growth without fail and based on city forecasts, this trend is set to continue for the foreseeable future. With this being the case, the forward valuation of 20.5 times earnings does not seem to be overly demanding. 

As the firm continues to go from strength to strength, it looks as if it will continue to thrash the FTSE 100 every year.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Southern Rail passenger revenue should be up around 3%, with London Midland revenue up 4.5% and GTR revenue down 4.5%. The company expects regional and London bus revenues to be up around 1%.

A new 13-year rail contract in Germany, due to start operations in 2019, should deliver around €20m in annual revenue, and further international bids are in the pipeline, including one in Singapore which is due to be awarded later in the year.

Low valuation

At a price of 1,838p, the shares are up just 0.3% on the day, and at that level I think we’re looking at a bargain — it puts the shares on forward P/E multiples for this year and next of under nine. Some of that will be due to forecast EPS falls of 5% and 1% respectively, which look disappointing after two years of 20%-plus rises, but I reckon the reaction is overdone — and I can’t help seeing the 27% share price fall since November 2015 as providing us with a buying opportunity.

Dividends have continued to grow, and the share price slump has raised the predicted yield as high as 5.7% for this year. It should be around twice covered by earnings, so I’d expect it to be safe.

Go-Ahead was shouldering £287m in net debt at the interim stage, and that’s what would concern me the most right now. It tempers the low P/E valuation a little, but I reckon Go-Ahead has a good longer-term future and a recovery should reward shareholders nicely.

Another rebound

If you want a company having a hard time, look no further than Fenner (LSE: FENR). It makes reinforced polymer products that are used in all sorts of industrial applications, but earnings have been in a bit of a slump — we’ve seen a slide in EPS from 36.1p as recently as 2012, all the way down to just 8.4p last year. 

And after a couple of years of being maintained, the dividend was finally slashed in 2016, from 12p per share to 3p.

As a result, the share price lost around 75% of its value between December 2013 and January 2016 to plunge as low as 94p. But since then, we’ve seen an impressive recovery to today’s 299p, as analysts are finally seeing light at the end of the tunnel now the firm’s restructuring plans are coming good.

Back to growth

There’s a 73% leap in EPS on the cards for this year, with a further 19% pencilled-in for 2018, though with the share price picking up again we’re still looking at a forward P/E of 21, dropping to 18 in 2018.

The dividend should be growing nicely again too, and though yields should only be around 1.5%, double-digit percentage rises would have it back to a decent level pretty soon if they can be maintained.

At the interim stage, the omens were good, with underlying pre-tax profit more than doubling to £16.5m and underlying EPS jumping from 2.9p to 6.3p.

I admit I’m still a little troubled by that relatively high P/E, but I reckon Fenner shareholders are looking at a profitable future.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But the group’s stock fell by more than 6% when markets opened on Wednesday, after it issued a rather mixed trading update. The good news was that retail sales rose by 19% to £1,268m during the second half of the year, thanks to growth in China and an “exceptional performance” in the UK.

The bad news was that most of these gains were the result of shifting exchange rates. Underlying retail sales rose by just 3% and underlying group revenue fell by 1% to £1,607m, thanks to a 13% slump in wholesale revenue.

In fairness, falling wholesale revenue was to be expected. Burberry is currently running down its stocks of beauty products in preparation for a shift to a new partnership with US group Coty, whose brands include Clairol and Marc Jacobs.

But the group’s retail operations account for 80% of sales. If underlying growth is slowing, then profits could come under serious pressure as the pound continues to gain strength against the US dollar.

Despite this, I believe Burberry remains attractive from a financial perspective. The group had more than £500m of net cash at the end of September and has a trailing 12-month operating margin of 14%. Although the short-term outlook is uncertain, I suspect the longer-term picture will be more favourable. I’d hold for now.

I underestimated this engineer

I sold my shares of Fenner (LSE: FENR) just before Christmas, thinking that at 250p, a recovery was already priced-into the stock. I was wrong. Fenner’s share price has since risen by another 35% to 337p.

The group delivered an impressive set of interim results today. Revenue rose by 11% to £307.4m during the six months to 28 February, while underlying operating profit was 60% higher at £24m.

The company said “market drivers in many of the group’s businesses are starting to look more favourable” and highlighted a “clearly improving trend” in oil and gas. As a result, the board now expects full-year operating profit to be “above previous expectations”. Management also expects to benefit from a lower tax rate in the current year.

I suspect there could be more to come from Fenner, but I think it’s worth considering what might go wrong. Like Burberry, Fenner has benefityed hugely from the weaker pound. While the group’s underlying operating profit rose by 60% during the first half, underlying growth excluding currency effects was just 27%.

Is it too late to buy Fenner?

Underlying earnings are expected to rise by 50% to 12.7p per share this year, and by a further 26% to 16p in 2017/18. This puts the stock on a forecast P/E of 25 for the current year, falling to a P/E of 20 next year.

Although the interim dividend was increased by 40% to 1.4p per share in today’s results, the stock’s forecast yield of 1% remains low. The shares seem fully priced to me, but they may well continue to outperform. I’d continue to hold, but wouldn’t buy more.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Improving economic data from Europe, the UK, and the US has offset concerns about what impact President Trump will have on global markets. And unless the billionaire unveils a dramatic U-turn in economic policy promises during the next few weeks, it looks as if equities will continue to head higher throughout March.

Shares in Ferrexpo (LSE: FXPO) should continue to benefit from this trend. Over the past six months, shares in the Ukrainian iron ore producer have thrashed the FTSE 100 rising 137% compared to the index’s gain of just 6%.

Improving sentiment 

Ferrexpo has benefitted from improving market sentiment towards miners and improving economic data that has sent the price of iron ore steadily higher. 

Thanks to management’s focus on quality over quantity, Ferrexpo has been able to improve earnings and profitability by producing iron ore pellets with a higher iron ore percentage, which sell for more than the market average. This strategy has enabled the group to, for the most part, navigate the mining industry’s cyclical downturn. Pre-tax profits fell to $25m in 2015, but the group remained in the black. Last year, according to a trading update issued at the beginning of January, the firm generated $35m of cash and retired $196m of debt.

For the year ending 31 December 2016, City analysts are forecasting earnings per share growth of 42% and pre-tax profits of £188m, up an amazing 840% year-on-year. For 2017 analysts are expecting earnings per share to grow a further 34% to 36.7p indicating a forward P/E multiple of 4.2. This valuation suggests that even after Ferrexpo’s epic run over the past six months, there could be further gains to come.

Undervalued growth

Shares in Fenner (LSE: FENR) also look set to continue to reward shareholders over the next few weeks. Over the past six months, shares in the group have gained 67% excluding dividends taking gains over the previous 12 months to 123%. However, over the last 30 days Fenner has slumped 13%. But after this pause, investors could be ready to push the shares higher once again.

Pre-tax profits have collapsed from a peak of 36.1p at the end of 2012 to 8.4p for 2016. This year, City analysts are expecting the firm to report earnings per share of 12.5p up 49% year-on-year. Further growth is planned for 2018 with earnings per share growth of 29% pencilled-in. Based on these estimates, shares in Fenner are trading at a forward P/E of 21.8, which may seem expensive, but when you consider the firm’s explosive earnings growth rate the shares look cheap as they trade at a PEG ratio of 0.4. For some investors, the temptation to buy shares in this undervalued growth stock could be too hard to pass up.

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Improving performance

Within Fenner’s AEP business line, the principal oil and gas business is seeing an improving trend in terms of order intake and customer enquiries. While this is reflective of its strengthening market position, it’s also due to a better outlook for the wider industry. OPEC’s decision to cut oil production for six months has boosted the oil price and revitalised the industry, with investment likely to rise over the coming months as profitability improves.

Within AEP’s specialist industrial businesses, Hallite is well ahead of last year due mainly to marketing initiatives and operating efficiencies. Meanwhile, other businesses within the AEP division are performing broadly in line with the same period of the prior year.

Within Fenner’s ECS business line, the restructuring of the North American business is going well. There has been a modest increase in order intake in that region, while in Europe trading continues to be satisfactory. And while higher commodity prices bode well for the company’s operations in Australia, tight cost management by resources companies has meant that order intake has yet to pick up.

An appealing buy

While Fenner trades on a price-to-earnings (P/E) ratio of around 32, it was expected to increase its bottom line by an impressive 10% in the current year. Today’s update means that this figure will now be increased, which indicates that Fenner could offer fair value for money even after today’s share price gains.

Furthermore, with market conditions likely to improve within the oil and gas and wider resources industries due to rising commodity prices, its earnings growth outlook remains positive. And with restructuring yielding impressive results thus far, now could be a good time to buy and then hold.

Similarly, industrial sector peer BAE ( LSE: BA) also offers an upbeat growth outlook. Defence spending is likely to rise in the coming years thanks to the election of Donald Trump, who has repeatedly stated that the US must become stronger from a military perspective.

Allied to this is the potential for higher spending among NATO members, with a 2% of GDP minimum apparently being suggested by the President-elect. A gradual move away from austerity could help to quicken the pace of this change, while increasing spending across the emerging world could also aid BAE’s bottom line. And with the company trading on a P/E ratio of 13.8, it offers a relatively wide margin of safety for the long term.

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Is either of these stocks a buy after this morning’s news?

Accounting changes hit profits

Accounting changes mean that reported profits from Rolls-Royce may be lower than expected until 2022. What’s happening is that Rolls-Royce will no longer be allowed to recognise future revenue from engine maintenance alongside revenue from engine sales.

Many of the group’s aero engines are sold at a loss. Profits are made from long-term engine maintenance deals. Major overhauls typically take place every five to seven years and are very profitable. But Rolls-Royce has historically brought forward some of this revenue to smooth out its annual profits.

From 2018, new IFRS15 accounting standards will mean this is no longer allowed. The group will only be allowed to recognise revenue in the year it’s actually paid. This means that from 2018 until 2022, profits from Rolls’ civil aerospace business are expected be lower than previously forecast.

To illustrate the impact of these changes, Rolls-Royce said this morning that if the new rules were applied to it 2015 results, operating profit would have fallen from £1,499m to £599m, a reduction of £900m.

I believe the changes are good news. Rolls’ profits and cash flow should match more closely and it should be easier for investors to value the stock. Under the old rules, Rolls-Royce shares trade on a 2016 forecast P/E of about 29, falling to 23 for 2017. In my view, that’s probably about right. I’d hold.

Results should beat expectations

Industrial group Fenner (LSE: FENR) has had a difficult couple of years, thanks to severe downturns in the coal and oil sectors. But conditions are improving. Fenner said this morning that profits for the 2016/17 financial year are likely to be “modestly ahead” of expectations.

The comments were made alongside the group’s 2015/16 results. These show that sales fell by 14% last year, while underlying pre-tax profit was down by 45% at £23.2m. However, Fenner’s strong cash flow remains an attraction. Operating cash flow only fell by 10% to £62.2m last year. This enabled it to end the year with net debt of £150m, slightly lower than expected.

An increase in the number of drilling rigs active in the US oil and gas sector is starting to drive higher demand for its products. Rising coal prices have also improved the outlook for the group’s conveyor belt business.

Fenner has maintained investment in its medical business during the downturn. Looking further ahead, the company believes this offers “significant new opportunities for growth.”

With Fenner shares trading on about 24 times 2016/17 forecast earnings, the shares are probably up with events. But today’s figures do give me confidence that further gains should be possible over the longer term.

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Fenner said it expects results for the year to August 2016 to register at the top end of market expectations, the business having been “helped in part by the translation effect on overseas earnings arising from the depreciation of sterling in recent months.”

The company — whose chief operations involve the manufacture of conveyor belts and seals for use in the mining and energy industries — has risen in recent months along with the wider commodity sector, as many market participants have predicted an imminent and sustained upturn in raw material values.

Investor confidence has also been buoyed by Fenner’s efforts to offset its uncertain revenues outlook through huge cost-cutting and streamlining measures. Just this week the company sold its US-based Xeridiem Medical Devices division for $10.5m to repair the balance sheet still further. Net debt clocked in at £150m as of August.

But I believe the hulking supply/demand balances hanging over commodity markets — and with it the uncertainty over the profitability of its main customers and consequent impact on operating budgets — means that Fenner is still in a sticky situation.

Indeed, the firm announced in April’s half-year update that “the difficult market conditions that have characterised the last four reporting periods continue.” And I believe a forward P/E rating of 20 times, well above the benchmark of 15 times that indicates reasonable value, fails to reflect Fenner’s high-risk profile.

Producer in peril?

Oil explorer Enquest’s (LSE: ENQ) share price hasn’t fared so well in Thursday business however, the stock last 4% lower after releasing a less-than-rosy half-year report.

Enquest advised that total production averaged 42,520 barrels of oil per day during January-June, up 43% from the corresponding 2015 period.

But technical issues at its Alma/Galia field have forced the business to cut its output target for the full year. Production of between 42,000 and 44,000 barrels per day is now expected in 2016, down from a previous estimate of between 44,000 barrels and 48,000 barrels.

Revenues slipped 12% year-on-year, to $391.3m, thanks to lower oil prices. Crude values averaged $62 per barrel in the first half versus $87 during the same period last year. But lower year-on-year costs helped Enquest print a 51% pre-tax profit rise, to $149.7m.

Investing in oil explorers is always perilous business, of course, but the prospect of a fresh dive in oil values makes Enquest a risk too far, in my opinion. Indeed, the City doesn’t expect Enquest to generate any earnings until 2018 at the earliest as black gold prices look set to toil.

And while the firm’s cost-reduction plan is still making great progress, a $1.68bn net debt pile as of June will leave the business in severe bother should oil prices fail to meaningfully recover.

The post Why I’d avoid these 2 commodities stocks after today’s updates appeared first on The Twelfth Magpie.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.