Frozen income

The dividend is still there but it’s been frozen at 80p for the last five years, as management looked to pour its money into R&D to get its once-mighty drugs pipeline flowing again. There’s no respite this year, with City analysts expecting the payout to fall slightly to 79.97p, both in 2019 and 2020.

Yet that’s no reason to shun this £77bn giant, which still offers a healthy forecast yield of 5.2%, beating the FTSE 100 average of 4.4%. Cover is a relatively healthy 1.4. The group’s return on capital employed is also a dizzying 64%.

Glaxo’s stock is even available at a tiny discount, currently trading at 14 times future earnings. Yet it doesn’t completely convince, with earnings forecast to fall 8% this year, although it’s slated to return to growth in 2020. Analysts are expecting the firm to report a net profit of £5.6bn for 2019, which would be a six-year high. 

Buy and hold

That’s the short-term stuff. In the longer run, I believe a good portfolio is made up of stocks like these, or should at least have exposure to them.

Healthcare is a terrific long-term theme as the global population ages – the sector was the best performer on the S&P 500 in 2018. Glaxo’s revenue and profits both look set to grow strongly in 2020 and, fingers crossed, it will be lift-off after that. Now may be a good time to get stuck in while it’s still relatively cheap.

Comeback kid?

Now here’s a very different pharma. Investors in inhaled drug device development specialist Vectura Group (LSE: VEC) have seen the stock lose more than half its value in the last couple of years.

Today, the £466m firm issued its 2018 preliminary results, but the market is underwhelmed. The stock is down 2.5% at time of writing, despite a 8.4% rise in full-year reported revenue to £160.5m, while inhaled portfolio revenues jumped 15% to £131.1m.

Cashing out

R&D costs of £55.5m were at the lower end of guidance as it refocuses its portfolio prioritisation and boosts R&D productivity. Adjusted EBITDA rose 51.2% to £39m, “driven by revenue growth, improved gross margin, lower R&D costs and productivity improvements.” However, it posted an operating loss of £105.4m, after ongoing amortisation and exceptional items, as it continues to take a hit from its disappointing phase III study of VR475 asthma drug-device combination.

Vectura did generate strong cash generation from operations, up 30.5% to £35.1m. This left it with closing cash and cash equivalents of £108.2m, while it also completed a £13.8m share buyback.

The pharma and biotech group is tilting at an airways diseases market that’s worth $40bn globally, but hasn’t fully recovered from a series of disappointing trading updates. Its share price slump has left it trading at 15.5 times earnings, which may tempt some. Earnings fell 53% in 2017, but are up 8.4% today, with 4% growth anticipated for 2019, and then 22% in 2020. The future looks brighter, but I’m still struggling to recommend it.

The post Why I’d invest £1,000 in the Glaxo share price today appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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, over the past three months, the shares have slumped 9.5%, and while this is a slightly better performance than the rest of the FTSE 100, I think it could be a sign of things to come.

A sign of things to come

One of the reasons I’ve always been wary of the shares is their valuation, which has never been particularly appealing to me.

City analysts are not expecting the company to report a profit for 2018 or 2019, so it is difficult to figure out how much the shares should be worth on earnings alone, although we can use historical figures. 

In 2017 the company reported a profit of 0.4p per share implying the shares are currently trading at a historical P/E multiple of 2,025.

That being said, shares in Ocado have always been priced based on potential rather than actual earnings, which, as we have seen over the past 12 months, can result in significant gains when the company gets it right. But even Ocado itself has admitted that it will be some time before it realises profits from the significant deals struck with clients.

With this being the case, I think in the current market environment it could only be a matter of time before the shares crash back to earth. The market has been willing to give the business the benefit of the doubt over the past few years, but now volatility has returned, I believe investors will turn their backs on speculative stocks like this and instead put their money to work in defensive dividend-paying champions. 

I may be wrong, but this is what has happened in previous bear markets. If this trend plays out in 2019, then shares in Ocado could fall off a cliff.

Several disappointments 

Another speculative stock I’m avoiding in 2019 is Vectura (LSE: VEC). I used to be a fan of this business but ran out of patience following a series of disappointing trading updates.

After merging with peer Skyepharma several years ago, Vectura has struggled to find its groove. Following the merger, losses ballooned from £5.9m in 2012 to £86m in 2017, although cash generation has remained strong, which has enabled the company to push ahead in developing its treatment pipeline.

Today, management has informed the market that its efforts to restructure the business over the past few years are starting to pay off. According to the update, the group now expects “revenue to be in line with, and EBITDA to be materially above, current market consensus expectations.” This is undoubtedly great news, but there is still a sizeable speculative element here. 

The company’s future rests on the approval of a generic version of GlaxoSmithKline‘s blockbuster Advair Diskus, which it is in the process of developing with partner Hikma. Regulators have already turned down the first attempt to get this new product to market, and the partners face an uphill struggle to get it there. 

With the shares changing hands at 17.5 times forward earnings, I think Vectura is overvalued considering its uncertain outlook.

The post Warning! I reckon this FTSE 100 stock could fall off a cliff in 2019 appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

Breathe in

Vectura is a specialist in the design and development of inhaled medicines but is currently a company on hold as it awaits US regulatory approval for a number of upcoming products, in particular the generic formulation of GlaxoSmithKline’s asthma big seller Advair Diskus, planned with Hikma Pharmaceuticals. 

Today’s interims were headlined “Vectura regaining momentum with continued inhaled revenue and adjusted EBITDA growth”, although clearly investors do not share management’s excitement. Total reported revenue for the period rose a modest 1.4% to £79.9m. Inhaled portfolio revenue rose 7.1% to offset a sharp 17.4% drop in non-inhaled portfolio revenues, due to non-recurrence of 2017 post patent royalties and lower product supply revenues.

Future stock

Guidance for R&D costs of £55m-£65m for 2018 remains unchanged, reflecting the group’s “refocused portfolio prioritisation and initiatives to transform R&D productivity.” Adjusted EBITDA rose 51.9% to £24.6m on productivity initiatives. Vectura’s cash balance has dipped from December’s £103.7m to £83.9m, although this reflects its completion of a share buyback programme, capital investment and annual cash flow phasing. 

This stock is all about the future, with management “progressing a series of new pipeline projects with significant potential future value.” The share price is down 60% over three years yet it still trades at a pricey 23.9 times earnings. Earnings per share (EPS) dropped 53% last year and City analysts are warning of a further 20% in 2018, then a 51% rebound next year.

Vectura confirmed that Hikma plans to submit data on their generic Advair to US regulators next year and anticipates a launch in 2020, with potential annual sales topping $250m. To show what this means, 2017 revenues totalled $148m. This stock is all about tomorrow, not today. You might want to build your retirement on more solid foundations.

Shire higher

Shire Pharmaceuticals (LSE: SHP) is a giant by comparison, a £40bn FTSE 100 pharma behemoth that is now bouncing back after falling out of favour following its $32bn acquisition of Baxalta in 2016. The stock is up a hefty 36% in the last six months on more takeover talk, only this time it is the target, with Japan’s Takeda Pharmaceutical lining up a $62bn deal. Throw in the company’s debt and the deal is worth closer to $80bn.

Takeda management reckons that Shire’s product portfolio and pipeline are highly complementary and will make it a leader in providing targeted treatments in gastroenterology, neuroscience, oncology, rare diseases and plasma-derived therapies. Takeda gets access to the US market, Shire gains Japan and emerging markets. Sounds fun all round.

As Kevin Godbold points out, Takeda may have to dig deeper into its pockets to secure the company or withdraw. However, he says that even if it does back out, this may alert other investors to the group’s undervaluation and trigger further bids. Shire currently trades at just 11 times forward earnings. I’ll be keeping a close eye on the bid, in case it throws up a buying opportunity.

The post Could these 2 pharma growth stocks help you retire early? appeared first on The Twelfth Magpie.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, Hikma Pharmaceuticals, and Shire. 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.

With this in mind, today I’m looking at one FTSE 100 income champion as well as company that looks as if could soon become a leading growth play. 

Defensive income 

I believe the best dividend stocks are those companies with a defensive business model. AstraZeneca (LSE: AZN) is a great example. 

It’s one of the world’s biggest pharmaceutical companies and it’s also rapidly becoming a leading player in the world of cancer treatment (oncology). Indeed, after registering 40% sales growth from oncology products during the first half of 2018, the segment hit 30% of total group sales during the second quarter.

Growth isn’t expected to slow anytime soon. Astra has a broad range of new treatments still under development, including Lynparza (ovarian cancer) and Imfinzi (earlier-stage lung cancer). It has also received a number of product approvals already this year such as Lokelma, a treatment for hyperkalaemia. 

These new products are helping the group return to growth. Astra is expecting revenues to expand in 2018 for the first time since 2014, as new products pick up the slack from struggling legacy treatments. Total sales declined 1% during the first half of 2018, but a second quarter gain of 2% has helped restore confidence in meeting the full-year growth target. 

City analysts are expecting EPS growth of 54% to $3.4 per share (270p) for the full-year. Based on this outlook, analysts are also predicting a small increase in Astra’s dividend payout this year, although I’m sceptical management will raise the 210p per share distribution in 2018. It’s more likely payout growth will return next year, when the group is firmly back on a growth footing. 

Even though I don’t expect the dividend to rise in 2018, I’m still impressed by Astra’s 3.6% yield. With growth expected to pick up, I’m happy to buy at this level.

Blue sky growth 

A company I’d buy alongside Astra is Vectura (LSE: VEC). A specialist in the design and development of inhaled medicines, Vectura is sitting on a cache of valuable product data. Its most valuable data is the generic formulation of GlaxoSmithKline’s asthma and chronic obstructive pulmonary syndrome therapy Advair Diskus. 

The company did hope to have this generic product on the shelves this year, but the firm and its partner, Hikma, have struggled to receive approval from US regulators. They’ve returned to the drawing board and expect to come back with a new proposal next year. In the meantime, Vectura is still generating plenty of cash from its existing stable of treatments. 

These treatments will produce EPS of 3.7p in 2018, according to analysts. What I’m excited about is the potential for growth in the years ahead. If Vectura’s generic Advair is approved, analysts reckon EPS could jump 42% in 2019. That could be just the start. In the meantime, the group has nearly £100m in cash on its balance sheet. 

At present, the stock is trading at only 21 times forward earnings, slightly above the pharmaceutical sector average of 20. Personally, I believe this is a small premium worth paying for generic Advair’s blue sky potential.

The post One FTSE 100 income champion and one growth star that could help you retire early appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Vectura Group and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. 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, regulators do not believe that the product is currently ready for market. At the beginning of May 2017, the partners received a Complete Response Letter from the US Food and Drug Administration, laying out the regulator’s concerns about the product and why it wouldn’t be approving it for sale. The partners responded to this letter at the end of last year, to try and resolve the regulators’ concerns. The critical point of contention is around the results from the Clinical Endpoint Study, which shows the effectiveness of the drug. 

Unfortunately, after some consideration, it has been announced today that the FDA has upheld its original decision and has requested that Hikma completes an additional clinical study. This now means the product won’t be on the market until at least 2020, several years behind schedule. 

Massive opportunity 

Advair was one of Glaxo’s best-selling drugs pulling in £5.1bn for the company in 2012. Income has since fallen to nearly £3bn, but there’s no denying that it remains a massive moneyspinner for the firm. And now that the treatment has lost patent protection, competitors are rushing to get in on the action. As well as the Vectura/Hikma partnership, generic drugs giant Mylan is also pursuing an alternative. While this treatment has also been knocked back by the FDA, Mylan still has a chance to win a US green light for its version of generic Advair in 2018. 

Realising that time is of the essence, Hikma has already finalised the planning of a new clinical study and expects to start patient enrolment in the coming weeks, putting it on track to submit a new study to the FDA in 2019. 

In the meantime, these two companies have other products that will pick up the slack. 

Safety in diversification 

For the first half of 2017, Vectura reported recurring revenues increased £71m up 26% year-on-year and adjusted earnings before interest, tax, depreciation and amortisation more than doubled to £11.1m. A further update at the beginning of 2018 revealed that sales of the firm’s Ultibro and flutiform inhaled airways products increased 18% to $101m and 12% to €47.8m respectively during the third quarter, and the group ended the year with cash and equivalents of £104m. What’s more, there’s speculation that Glaxo may take advantage of Vectura’s weak share price to launch a 175p per share bid for the company.

Meanwhile, Hikma has just brought in a new CEO, Sigurdur Olafsson with 25 years of experience to help ignite sales growth at the producer of generic drugs, although it seems the market is unconvinced that he will be able to instigate a turnaround. The shares are currently trading at a forward P/E of only 14 and EV/EBITDA ratio of 7.6, less than half the sector median of 16.6. And in my view, despite undeniable issues to face, this valuation severely undervalues Hikma’s potential as one of the world’s leading generics producers. 

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Rupert Hargreaves owns shares in Vectura and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

Although the FDA stopped short of outright refusing to approve the product, the letter means that it is unlikely the generic treatment will receive approval this year. While no material issues were raised by the Federal agency it will take some time for Hikma to assess what is required from the agency in order to get the treatment through to customers.

Drug problems 

The drug in question is Hikma’s VR315, a generic asthma treatment that uses a powder formulation licensed from Vectura. If approved, it would have been a huge boon for both companies as it is estimated the size of the market the treatment is targeting is worth nearly £2bn. Hikma is set to manufacture the drug while partner Vectura would have received royalties and milestone payments.

While today’s news is a setback for both companies, it is not the end of the world as both Hikma and Vectura have well diversified product portfolios. But there was a lot of expectation built into the share prices of both companies, which is why today’s declines are so severe.

So what’s next for these two pharmaceutical producers? Well, VR315 isn’t the first Advair replacement to get a cold shoulder from the FDA. Peer Mylan has also submitted its own version and the FDA responded in a similar manner, by stating that the company needs to make a “major” amendment to its application. According to agency guidelines, a “major” amendment means a delay of 10 months for an FDA response. With this being the case, it looks as if Vectura and Hikma are not out of options just yet, and the partners will likely make the required amendments to their applications and resubmit. This means that over the next 12 months, the firms may have some good news for investors, or if things don’t go to plan, more bad news may be on the horizon.

Put simply, today’s news means there’s more uncertainty ahead for Vectura and Hikma but investors should not concentrate on just this one setback.

Steady growth

Over the past five years Hikma’s earnings per share have nearly doubled and City analysts are expecting earnings growth of 14% this year followed by growth of 28% for 2018. Analysts were cautious about VR315’s potential heading into the FDA announcement, so it’s likely these forecasts do not include a significant contribution from the treatment. And after today’s declines, shares in Hikma have fallen to a valuation of only 18.5 times forward earnings, below the company’s long-term average of 19.4. 

Vectura is slightly more speculative than Hikma, but the company has enough cash on hand to be able to wait for further comment from the FDA over the next 12 months. At the end of 2016 the company had £92.5m in cash and equivalents as well as a packed pipeline of other treatments the firm is trying to develop.

Overall, while today’s news is a setback for both, it’s not the end of the world for either company.

The post Are these bombed-out pharma stocks worth buying? appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares of GlaxoSmithKline and Vectura. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

Let’s get one thing clear. British-based pharmaceuticals group Vectura (LSE: VEC) isn’t one of those speculative AIM stocks that hopes to one day find a miracle cure that will catapult its share price into the stratosphere. It’s an industry-leading specialist in inhaled therapies for the treatment of respiratory diseases, with a market value in excess of £1bn. So why am I suggesting that its share price could double within two years?

Business transformed

Well for a start the Chippenham-based firm has an excellent track record when it comes to revenue and earnings growth. Since 2013, the group’s revenues have quadrupled to £126.5m, with an underlying loss of 1.8p per share swinging to earnings of 7.43p per share over the same period.

Just recently the FTSE 250 group announced its full-year results for 2016 with matters complicated somewhat by the fact that its financial year-end was changed from March to December, meaning that the figures were for a shortened nine-month period. Nevertheless, Vectura put in a strong performance with the June 2016 merger with Skyepharma helping to completely transform the outlook for the business.

94% upside

Group revenue for the period increased by a massive 75.7% to £126.5m, with recurring revenue accounting for 80.1% of the total. Significantly, revenues from seven recently-launched key inhaled products now represent 61.8% of the group’s total revenues. With momentum now coming from these new products, strong growth in like-for-like recurring turnover is anticipated for 2017, and beyond.

Furthermore, Vectura has made excellent progress with the merger integration and organisation changes, and the group remains on track to deliver at least £10m in savings each year from 2018 onwards. From a valuation perspective, the shares currently trade on a P/E ratio of 21.7, falling to a more appealing 14.6 by the end of next year. If this was to revert to the three-year average of 28, the shares would be worth 297p, representing 94% upside from the current price of 153p.

Attractive valuation

Meanwhile, another mid-cap healthcare specialist that I believe offers plenty of upside is BTG (LSE: BTG). The FTSE 250 group has a portfolio of interventional medicine products to advance the treatment of cancer, severe emphysema, severe blood clots and varicose veins, and speciality pharmaceuticals that help patients overexposed to certain medications or toxins.

It has just completed its financial year ended 31 March, with last year’s acquisition of Galil Medical helping to strengthen its portfolio, capabilities and leadership in interventional medicine, which is its fastest growing and highest revenue business. Full-year results won’t be announced until May, but analysts are talking about a £113m rise in group revenues to £561m, with pre-tax profits climbing to £88m, a £30m improvement on the previous year.

BTG currently trades on an attractive valuation with the P/E rating falling to just 15.6 by FY2019, compared to a five-year average of 33, indicating significant upside potential.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended BTG. 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.

Earnings before interest, tax, depreciation and amortisation in the nine-month period hit £34.1m, up from the £23.2m reported for the prior 12-month period.

Cash is king

On a pro-forma basis that compares the nine months to the end of 2016 versus the nine months to the end of 2015, revenue was up 27% to £115.6m from £91.6m while EBITDA was up 57% to £17m from £10.8m.

Unfortunately, due to higher amortisation charges of £64m, compared to just £18.8m for the prior 12-month period, Vectura’s pre-tax loss ballooned to £40.1m. But in many ways this accounting loss is irrelevant. What really matters is its cash generation. During the nine-month period, the company generated £28.2m of cash, taking the cash balance to £92.5m at the end of the period, almost 9% of Vectura’s market capitalisation. 

As it shortened its financial year after merging with Skyepharma, these results should be interpreted as the group’s full-year 2016 results. Analysts had been expecting a loss from the company but going forward they believe its earnings will surge. For 2017 earnings per share growth of 27% is pencilled-in and for 2018 growth of 48% is expected as the firm continues to roll out new products. 

Even though shares in Vectura currently trade a forward P/E of 25.4, this growth is certainly worth paying for, especially considering its cash balance. The company does not currently offer a dividend although considering the cash pile it holds, I wouldn’t rule out a dividend in the near future. 

Dividend champion 

As well as Vectura, shares in National Accident Helpline (LSE: NAHL) are also rising today following an upbeat set of results from the company. 

For the year ending 31 December, underlying revenue declined 2.6% to £49.4m but underlying operating profit rose 15.1% to £18m thanks to an improvement in the firm’s operating profit margin from 30.8% to 36.4%. Profit before tax increased 13.3% to £15.8m and basic earnings per share rose 1.4p to 27p. Off the back of these results, management has increased NAHL’s dividend payout for the year by 1.6% to 19.1p giving a dividend yield of 11.4%. 

City analysts are not optimistic about NAHL’s outlook but today’s results should alleviate concerns about the company’s future. Falling revenue but rising profitability shows that NAHL can adapt to the changing regulatory environment, which is good news for shareholders. 

And even if earnings collapse as predicted over the next two years (analysts have pencilled-in a 30% decline in earnings per share) the shares still look cheap. Based on 2018 forecasts, shares in NAHL currently trade at a forward P/E of 8.2 and support a dividend yield of 8.6%. 

The post 2 shares with explosive long-term growth potential appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

Rupert Hargreaves owns shares in Vectura. 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.

Upcoming pharma?

Vectura Group (LSE: VEC) is a smaller pharmaceuticals company developing inhaled treatments for respiratory diseases, and that’s certainly big business. Vectura took over rival Skyepharma in 2016, so full-year results (due in March) will be heavily influenced by that. The firm’s pre-close update said that things are going as expected, with the City predicting a 4% drop in EPS.

But that small fall is nothing to worry about, and 2017 looks to me like it could be a transformational year for Vectura. There’s a continuation of the last couple of years of earnings growth on the cards, with analysts forecasting 43% growth this year, followed by 52% next. But what does the share price look like?

Despite a couple of years of prior rises, the shares have been falling back since the beginning of 2016. And at 145p today, we’re looking at a forward P/E based on 2017 forecasts of 18, dropping as low as 11 for 2018. I reckon that’s cheap for a growth share, especially as it gives us PEG ratios of just 0.4 and 0.2 respectively (where 0.7 or less is usually seen as good).

Vectura looks tempting to me.

Power growth

If you’re looking for a straightforward business model, you’ve got it in OPG Power Ventures (LSE: OPG). OPG develops and operates power plants in India, and it’s turning into a nicely profitable business.

Earnings have been rising for several years now, and the firm paid a maiden dividend of 0.26p per share at the interim stage after announcing a doubling of revenue and an 81% rise in EBITDA. We also saw free cash flow of £20.6m and a small fall in debt.

There’s a 0.89p dividend, for a 1.6% yield, predicted for the full year ending March 2017, and forecasts suggest it will rise as high as 3.8% by 2019. But the dividend is not the only attractive thing.

At 56p, the share price has almost halved since its 2015 peak, and that’s dropped the forward P/E as low as nine, dipping to a forecast 7.3 by 2018. And that gives us PEG ratios of 0.5 this year and 0.3 next, which look pretty good. There will be uncertainties due to India’s sometimes unpredictable regulatory regime, but that valuation looks low enough to me to more than compensate for the risk.

Where there’s muck

Augean (LSE: AUG) not only has a great name for a waste management company, it also has attractive-looking growth prospects. The firm’s January trading update told us that 2016 pre-tax profit should be in line with expectations, supporting a predicted 14% rise in EPS. That comes after a solid five-year record of EPS growth, with a further 15% expected this year.

We also heard that Augean “generated strong net operating cash flows during 2016 and as at 31 December 2016 net debt was £10.8m which is £2.3m better than expected,” so the firm’s modest but progressive dividends (yielding around 2%, but rising) are pretty much assured.

Despite the squeaky clean outlook, Augean shares are lowly valued. At 49p, they’re on a P/E of only 9.3, dropping as low as 6.6 on 2018 forecasts — and PEG ratios come in at 0.3 for 2017, followed by 0.6. Could be the best growth prospect of the three.

The post 3 growth stocks I’d buy right now appeared first on The Twelfth Magpie.

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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. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Bright future

I’m convinced that FTSE 250 respiratory drugs and devices group Vectura (LSE: VEC) has a bright future, as both a business and an investment.

Vectura merged with Skyepharma last June and the increased scale and breadth of the group give it the potential to develop into a respiratory powerhouse, as it competes across all the major respiratory classes.

In a pre-close trading update earlier this month, the company said that revenue for 2016 is anticipated to be in line with the board’s expectations and that positive momentum from seven key recently-launched inhaled products provides a strong base for recurring revenue. Chief executive James Ward-Lilley also reported “significant progress” with the company’s pipeline of products.

Vectura’s 2016 financial year is a shortened one of nine months as, since the merger with Skyepharma, it’s changed its year-end to 31 December, to align with its partners and peers. As such, I look to the forecast financials for the full-years 2017 and 2018 for my valuation. At a share price of 130p, these give a P/E of 16.6, falling to 10.9 and a P/E-to-growth (PEG) ratio of 0.2, which offers tremendous value.

Based on the attractive valuation and long-term demographics of ageing populations in the developed world and rising prosperity and demand for healthcare in emerging markets, I rate Vectura a ‘buy’.

Overvalued?

AO World (LSE: AO) has come along way under founder and chief executive John Roberts since he bet a friend a pound that he could change the way white goods are purchased via the Internet, way back in 2000.

The company is well-managed, has grown rapidly in the UK, is expanding into Germany and the Netherlands, and says its “on a mission to become a leading European online retailer of electrical products”.

But — yes, there is a but — the company is still forecast to be loss-making for its financial year ending 31 March. For fiscal 2018, the forecast is for pre-tax profit of just £3.7m on turnover £860m and while profit is forecast to rise to £16.1m for fiscal 2019, it will take a whopping £1,018m of turnover to produce it.

In other words, this is a low-margin industry, which doesn’t appeal to me as an investor. Small profits can easily swing to large losses when margins are thin, whether due to the company making a misstep or external forces beyond management’s control.

And speaking of external forces, the company said in a third-quarter trading update earlier this month that while it expects full-year performance to be within its previous guidance, it’s “cautious about the final quarter given the uncertain UK economic outlook, currency impacts on supplier pricing and the possible effect on consumer demand”.

Based on the potential for AO World to suffer a setback at some point in its expansion and a sky high valuation (a P/E of 245 for 2018 and 53 for 2019), I rate the shares a ‘sell’ at a current price of 159p.

The post One growth stock I’d buy and one I’d sell in February appeared first on The Twelfth Magpie.

More reading

• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• With a 7% yield, is this dividend share a no-brainer?
• The CMC Markets share price is smashing the FTSE 100 in 2026. Is there an opportunity here?
• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?

G A Chester 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.