Flying high…for now

In the year to the end of September, revenue climbed 11.7% to £2.38bn (once foreign exchange fluctuations are taken into account) with a 3.1% rise in like-for-like sales the result of growth in air passenger travel and what the company labels as “retailing initiatives“. The latter percentage, when combined with operational improvements and new openings in North America and Asia, allowed SSP to record a stonking 27% jump in operating profit (to just under £163m) over the period. Underlying pre-tax profit soared 38.3% to almost £149m.

While economic uncertainties have led the Upper Crust and Ritazza owner to speculate that revenue will slow in 2018, it also revealed that the new financial year had started in line with expectations. Although its bi-annual payouts to shareholders remain low relative to some companies on the market, today’s final dividend of 4.9p brings the full-year payout to 8.1p — a 50% increase on that returned to investors last year. A further bonus was the announcement of a proposed £100m special dividend in the near future.

With figures like these, it’s really no shock that SSP’s share price rose over 7% in early trading. Factor-in the company’s rising returns on capital employed, excellent free cashflow and captive audience and you begin to understand why investors continue to clamour for the stock.

Nevertheless, with a valuation of 29 times earnings for the next financial year, I’d say a lot of good news is now firmly priced-in. Indeed, with a price-to-earnings growth (PEG) ratio of over 3 for 2018/19 (with anything below 1 indicating good value) and a market cap approaching £3bn, I’m beginning to question how recent share price performance can be sustained.

All told, I wouldn’t blame those with short investing horizons for realising some of their gains sooner rather than later.

A tempting alternative

Those looking for exposure to the general industry in which SSP operates but unwilling to pay up for its stock may be more tempted by cake-specialist and casual dining operator Patisserie Holdings (LSE: CAKE).  

After what feels like an exceptionally quiet period in terms of news, many existing holders will be eagerly looking forward to full-year results from the £310m cap, particularly after May’s interim numbers revealed an 11% rise in revenue and 16% increase in pre-tax profit. Back then, Executive Chairman Luke Johnson declared he was confident in being able to deliver “a successful second half of the year“. By next Monday, we’ll know whether this was achieved.

Even if the recent rise in inflation and reduction in consumer spending (not to mention Brexit-related nervousness) has impacted negatively on trading, I’d still be tempted by the stock. While not screamingly cheap, Patisserie — trading at 17 times expected earnings for the next financial year — is significantly less expensive than SSP Group. Returns on sales and capital employed are also far higher at the debt-free Birmingham-based business.  

While making an investment around results time is a risky strategy, I think any price weakness could be a great opportunity for new investors to take a position.

The post Time to take profit on this top growth stock? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of SSP Group. The Motley Fool UK has recommended Patisserie Holdings. 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.

However, the sad fact, as I’ve outlined in other articles on this site is that many investors will end up on the losing end of the trade as things can often become worse before they start to improve.

And it’s along those lines that I’ve decided to highlight two bombed-out companies; The Restaurant Group (LSE: RTN), which most of us will recognise as the owner and operator of the Frankie & Benny’s chain of eateries, and UK-based support services and construction company Interserve (LSE: IRV).

As can be seen from the chart below, both of these shares have been ravaged by investors dumping them for different reasons – but has this created an opportunity for the brave, or are these shares value traps waiting to snare the unwitting investor before another lurch south? Let’s take a closer look…..

Discount dining?

First up is The Restaurant Group. Traditionally this share commanded a PE ratio in the high teens as the company rolled out its principal trading brands including Frankie & Benny’s, Chiquito and Coast to Coast.

However, all this changed in January when management updated investors on the full year, reporting strong sales and cash flow, but were cautious going into 2016 given the upcoming introduction of the national living wage in April, a possible Brexit and general global uncertainty. With the shares priced for growth, investors headed for the exit giving rise to a 30% fall in the share price.

The most recent update saw the CFO depart with immediate effect (rarely a good sign) and a further deterioration in trading mainly focused at Frankie and Benny’s, causing management to cut earnings estimates for 2016 – when questioned the CEO admitted that they didn’t expect trading to improve in the near term and that it could worsen – this wasn’t what investors wanted to hear and the shares took a further lurch south.

Following the updates, a strategic review has been launched, and while this is in its early stages, it could mean that the company is split, or indeed bought in its entirety by say a private equity group on the hunt for a profitable, cash generative business.

Shaky foundations?

If I told you that there was a share trading on a forecast PE ratio of less than five times earnings and expected to yield over 8%, I’m sure there would be a queue forming at the door, especially if most of the business was trading in line with expectations.

And in the main Interserve is trading in line, apart from a contract under the UK construction division that will now be significantly impacted by further deterioration in an energy from waste contract that will result in further cost overruns and delays causing a £70m exceptional contract provision to be taken in the first half of 2016.

It’s clear that investors are treating this share with caution as things could worsen moving forward, however, for the brave among us – this could represent an attractive entry point.

The post Are The Restaurant Group plc (-60%) and Interserve plc (-50%) stonking buys, value traps or takeover targets? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Dave Sullivan 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.

Yet I reiterate my view that this a great time to buy shares, particularly emerging market shares, as share prices are as cheap as they will ever be. You don’t buy when optimism abounds and everyone is piling-in. You buy when there’s panic, when there’s blood on the streets. As they say, fortunes are made in bear markets. You just don’t know it at the time.

Only invest in companies that make money

But then you’re faced with the question, what should you buy? Investing may seem easy, but it isn’t. Just what makes a company a good investment?

People talk about debt, growth, turnover. But there’s one thing you should consider above all else when you research a company: Earnings.

Post-Credit Crunch, the world has changed. If New York was once the centre of the world, now it’s Shanghai. A world that wasn’t producing enough, that constantly went through bouts of inflation, has turned into a world that produces too much, and is headed towards deflation. Near-zero interest rates and infinite QE once seemed implausible. Now they’re a fact of life.

This means the environment companies work in has changed from night to day. Competition is more global (and more fierce) than ever before. In the 1980s, when you talked about supermarket retailers in this country, the main ones were Sainsbury, Tesco and Asda. Now we have Sainsbury, Tesco, Asda, Morrisons, Waitrose, Marks & Spencer, Aldi and Lidl.

And these are becoming harder to find

Record shops like HMV and Virgin didn’t have to worry about Amazon and a thousand other internet retailers. With high interest rates, the high street banks such as Barclays and Nat West made billions of pounds of profits each year. Now the legacy of the Great Recession, including bad debts, fines and banker-bashing, means that banks find it difficult to turn a profit at all. And a surfeit of supply in commodities mean that firms like BP and Rio Tinto are seeing their income slide too.

Company pricing power, and margins, are being crunched. Meanwhile, the powerhouses of China and India are just starting to pick up steam. ChemChina’s recent bid for Syngenta, one of Europe’s most impressive chemicals companies, is a sign of things to come.

So what can investors do? Just follow the profits. And there are a lot of profits to follow. The world’s pool of consumers is far greater than ever. That means buying into Unilever, Reckitt Benckiser, Next, AstraZeneca, EasyJet, Prudential, Google and HSBC. And emerging market stocks and funds: Hutchison China Meditech, Ali Baba, Fidelity China Special Situations and JP Morgan Indian Investment Trust.

Put simply, if you can’t see strong and rising profitability for a company you’re looking to invest in over the next few years, then avoid. Forget about what made money in recent decades and fix your eyes firmly on the horizon in front of you.

The post The Most Important Thing You Need To Consider When Investing appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Prabhat Sakya owns shares in Fidelity China Special Situations and JP Morgan Indian Investment Trust. 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.