In its last annual report, the Polypipe Chair said 2019 market conditions had been tough (sales were down) but Polypipe was making progress and it planned to focus on growing M&A in 2020. Unfortunately, the pandemic struck and times were tough for a while. But it began steering a recovery and has continued to make acquisitions.

Strengthening this FTSE 250 stock

Last month Polypipe acquired London Topco Limited (known as ADEY) for £210m. ADEY is a sector leader in providing magnetic filters and chemicals that improve energy efficiency in water-based heating systems for the residential market. It’s a company with a good record of growth and profitability. This acquisition is a great fit for Polypipe’s existing offerings and will help grow its target market. Polypipe’s customers include housing developers, plumbing, and heating installers and specialist distributors.

The focus on improving energy efficiency is also highly appropriate for now when environmental regulations are tightening. By next year, it’s expected that filter installations in every new-build heating system will be compulsory. That’s because they can reduce carbon emissions by 7%.

Polypipe paid for ADEY through a mixture of debt and an equity placing. However, diluting Polypipe shares and drawing down debt, takes the shine off the initial upside gain from this acquisition.

Acquiring Nu-Heat Holdings

Prior to the ADEY acquisition, Polypipe acquired heating systems supplier Nu-Heat Holdings for £27m on a cash-free, debt-free basis. This is another company that fits well with the FTSE 250 group’s strategy and complements its brands. Like ADEY, Nu-Heat also has a history of growth, profitability and good cash flow generation.

Martin Payne, Polypipe CEO said the buy would help it develop new ways to integrate underfloor heating, heat pumps, and air-based climate management systems.

Cautious optimism

In a recent trading update, the board said it expects underlying operating profit to come in around £40m. This is a slight improvement on previous expectations. But it’s a lot less than 2019, when underlying operating profit rose to £78.1m.

The company has begun 2021 with a strong order book though and the Polypipe share price is up 12% in a year.

The FTSE 250 stock currently has a price-to-earnings ratio of 23 and earnings per share are 25p. The company cancelled its interim dividend but hopes remain for a full-year dividend.

With the country getting vaccinated and gradually emerging from this latest lockdown, optimism prevails. However, worries of further Covid-19 case surges and potential mutant strains urge caution.

Emergency boiler repairs have kept plumbers busy over the winter months, and that should have helped Polypipe maintain a level of business as usual. But risks posed to the business include inflation and post-Brexit after-effects. Inflation could cause raw material prices to increase. There are already signs of this happening throughout the construction industry. And it’s possible Brexit has disrupted Polypipe’s supply chain or increased product costs. Either of these scenarios would impact revenues.

If I owned Polypipe shares, I’d continue to hold. Whether I consider buying will depend on its 2020 full-year results and future outlook, at today’s price it’s not a cheap stock. Polypipe’s final results for FY20 are due next week. I’ll be watching.

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Of course, this is only a projection. There’s no guarantee any company will see an improvement in sales or profits this year. The opposite could happen if the economic situation does not improve. 

I’m well aware of this uncertainty, but nevertheless, here are three FTSE 250 growth shares I would buy ahead of a potential stock market recovery. 

Stock market recovery

One FTSE 250 stock I would buy to play the stock market recovery is Pagegroup (LSE: PAGE). The pandemic has floored the recruitment consultancy. Its earnings are predicted to fall around 90% for 2020.

However, recent figures suggest the UK employment market is already starting to stabilise. As the economy begins to open up again, demand for employees could accelerate. That would be good news for companies like Pagegroup. Analysts are already forecasting a substantial increase in earnings for 2021. 

This business isn’t without its risks. The company’s earnings are highly sensitive to the economic cycle. That means if the recovery stalls, Pagegroup’s recovery will as well. This corporation could generate high returns, but there is also a risk of high losses as well. 

FTSE 250 growth

Wizz Air Holdings (LSE: WIZZ) is another high-risk, high reward opportunity. This airline entered the crisis with a strong balance sheet and market position. As a result, it has been able to survive where others have failed. 

This has put Wizz in pole position to capitalise on the economic recovery over the next few years. Improving investor sentiment due to the stock market rally should also help the stock. 

That said, the airline business is notoriously difficult. Just because Wizz has been able to navigate this crisis does not mean that it will be able to navigate the next. Further, coming out of the pandemic, airlines could engage in a price war, which would push down profits across the industry. This would impact shareholder returns at Wizz and other airlines. 

I would buy the FTSE 250 constituent to play the stock market recovery, but it may not be suitable for all investors.

Construction enterprise

Finally, I would buy FTSE 250 construction business Polypipe (LSE: PLP). 

The UK housing market is booming, and the combination of low-interest rates, high demand, and the stamp duty holiday, which may be extended, suggests this trend will continue.

The government is also planning to unleash billions of pounds of infrastructure spending over the next few years, helping stimulate the construction sector.

This may be good news for businesses like Polypipe. A manufacturer of plastic piping systems for the residential, commercial, civil and infrastructure sectors, the company may benefit from rising demand if construction sector spending increases. 

Polypipe may see high demand for its products and services over the next few years, but it could also face challenges. Like the airline industry, construction is a notoriously challenging industry to navigate. Commodity costs have also been increasing recently, which may impact the manufacturer pushing down its profit margins. 

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I’d avoid Barclays and the other banks. Instead I’d invest in the shares of companies with businesses outside the financial sector, such as Polypipe (LSE: PLP). With the release of its full-year report this morning, the company’s share price has been rising.

No hit to trading yet

Polypipe makes plastic piping systems for the residential, commercial, civil, and infrastructure sectors. In the domestic setting, for example, it’s the sort of stuff you might plumb up your central heating wet system with.

The firm’s range is vast, with over 20k product lines, and it operates from 19 facilities. In 2019, around 90% of the revenue came from the UK, 5% from the rest of Europe, and 5% from the rest of the world.

The directors said in today’s report that they are keeping the coronavirus pandemic under “close review”. They are taking “all appropriate actions” to ensure the health, safety, and wellbeing of employees and to minimise disruption to operations. But, so far, the virus has not affected the business much.

Chief executive Martin Payne said, “Aside from the yet unknown effects of Coronavirus on the wider economy”, he expects a year of progress ahead. Meanwhile, the figures for 2019 are steady. Revenue rose by 3.3% compared to the prior year, underlying cash from operations moved 2.2% higher, and underlying earnings per share lifted by 4.2%.

The directors pushed up the total dividend for the year by 4.3%. I reckon companies such as Polypipe must proceed ‘as usual’ because the effects of the coronavirus on the economy are as yet unknown. And my guess is that Polypipe’s operations supplying the nation’s plumbers and other trade professionals will be less affected than those of firms in other sectors, such as travel and leisure.

Steady growth

The company’s expansion has been driven by both organic and acquisitive growth. It has an impressive five-year record of generally rising revenue, earnings, cash flow, and shareholder dividends. So far, City analysts watching the company expect further single-digit percentage upticks in earnings and the dividend in the current trading year.

Such expectations could change if the coronavirus induces a massive general economic downturn. But I’d be more confident buying shares in a steady company like Polypipe than in many others.

With the share price at 478p, the forward-looking earnings multiple for 2020 is just over 15 and the anticipated dividend yield is around 2.7%. That’s not a bargain-basement valuation, but the company has been a steady performer for some time.

The stock is down about 22% over the past month, but even now it’s 80% higher than it was five years ago. I think Polypipe is proving its resilience in these tough markets.

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The following two saw their share prices climb more than two thirds last year, and they could have further to go this year.

Polypipe Group

Polypipe Group (LSE: PLP), which delivers sustainable water and climate management solutions for the built environment, returned almost 70% to shareholders in 2019, despite what it called tough trading conditions.

Its most recent update, from October, talked up a “resilient performance” in tough markets, but group revenue, nonetheless, rose 4.3% to £381.7m, with operating margins up 30 basis points, boosted by “margin accretive acquisitions and strong cost controls.”

This was before the general election, during a time when Brexit uncertainty squeezed domestic firms like this one, so it will be interesting to see if it benefits from any Boris bounce. The £1.1bn group has several factors in its favour, which it identifies as the “structural housing shortage, historically low interest rates, real wage growth, and near full employment.” 

If you’re bullish on the UK economy, this could be a good way to play its recovery. Despite its strong share price growth, the Polypipe share price isn’t too expensive, trading at 17.4 times future earnings.  

Growth forecasts also look positive, with 8% expected this year, and 7% in 2021. You get a forecast yield of 2.5%, although this is primarily a growth stock, and one that may repay further digging.

Avast

Cyber-security specialist Avast (LSE: AVST) also flew in 2019, as it continues to benefit from operating in a rapidly growing area, with the market forecast to be worth $170bn a year by 2022.

Unfortunately, the £4.6bn group hit a stumbling block in January, when it was forced to close down 2013 acquisition Jumpshot, which had been caught scraping browsing data from the company’s customers without full permission, and selling it to advertisers including Google, Yelp and Microsoft.

The hugely embarrassing revelation, exposed by Motherboard and PCMag, knocked the Avast share price down 25%, although it has picked up 16% in the last week. Given that Jumpshot harvested millions of dollars from clients, future revenues could take a hit, although management said Jumpshot produced just $36m of full-year adjusted 2019 revenue, against $862.8m for the group.

The closure should therefore have little impact on its full-year 2019 results, which are line with expectations. Customer trust may prove harder to rebuild, although given the minimal long-term impact that the big data scandal had on Facebook and others, investors may not be too worried.

Avast is a top-five antivirus provider with more than 400m customers worldwide, and expects full-year organic billings to be up 10.2% to $900.7m.

Analyst Peel Hunt recently said its stock may be overvalued, given that it now faces threats from Windows Defender, and the move towards cloud-based services. Avast still has massive potential, but it can’t afford further slip-ups.

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The case for investing becomes even more compelling when we remember that earnings rose by 8.5% to 66.5p per share last year. A further increase of 2.4% is expected in the 2018/19 financial year, suggesting that the mighty dividend will remain safe.

It’s hard not to be tempted. But it is worth considering the reasons why investors have been selling the stock this year, pushing Barratt’s share price down by 25% to about 485p.

Risk vs opportunity

Fears about the end of the Help to Buy scheme have been pushed down the road. The Chancellor has now extended this scheme to 2023, with tapering from 2021. But builders are still facing rising costs and slowing sales, at least in the south east.

Another problem is that affordability remains poor in many areas of the UK, with house prices at record highs. As a result, a number of the firm’s rivals have said they’re focusing on building cheaper homes and build-to-rent properties.

These problems don’t seem to have affected Barratt so far. The group’s operating margin rose by 0.5% last year, during which the company built a record 17,579 homes.

However, there’s always the risk that Brexit will trigger a recession. Sales certainly seem to be slowing. The group’s sales rate fell to 0.72 reservations per outlet per week during the first 15 months of the year, down from 0.74 during the same period last year. Although this isn’t a big fall, my calculations suggest that this is equivalent to a 2% drop in private sales.

Buy, sell or hold?

In my view, Barratt Development’s share price already reflects some of the risks facing the company. The stock now trades at just 1.3 times its tangible net asset value, compared to a multiple of 1.8 times in November 2017.

If market conditions remain broadly stable, then I think Barratt stock looks quite reasonably priced at the moment. The shares could be worth considering as an income buy.

Strong residential growth

Another way to invest in the housing market is to buy shares in companies which supply housebuilders’ raw materials. One of my favourite stocks in this sector is plastic piping specialist Polypipe Group (LSE: PLP). This FTSE 250 company produces pipes for drainage, sewers, rainwater harvesting and ventilation systems.

In a trading update today, Polypipe said that like-for-like sales of residential products rose by 11.5% to £204.3m during the 10 months to 31 October.

Residential sales were said to be strong in the new-build housing market, but weaker in the ‘RMI’ market — repair, maintenance and improvement. This may suggest homeowners are cutting back on spending on their homes.

Like-for-like sales of commercial building and infrastructure products rose by 8.6% to £161.6m. The company says this growth was driven by new products such as a “tall building soil and waste solution” and a “large diameter sewer and drainage range”.

Management guidance for the full year remains unchanged. Although I would expect sales to fall during a recession, I rate this business highly and would quite like to own the shares. Trading on 13 times forecast earnings with a 3.2% dividend yield, I’d rate Polypipe as a stock to buy on the dips.

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Time to sell? 

Centrica last cut its dividend in 2015 (fiscal 2014) when a combination of factors forced the group’s hand. Falling oil prices, rising costs, increased political scrutiny, and a high level of debt meant management had little choice but to reign in distributions to investors. The payout dropped from 17p in 2013, to 13.4p in 2014, before dropping again to 12p for 2015.

At the time, the company believed reducing the distribution to 12p would be enough to lower debt and restore investor confidence. After a few years at this rate, the market believed growth would return. After all, for fiscal 2015 analysts had pencilled in earnings per share (EPS) of at least 20p (23p was reported), leaving plenty of room for dividend growth in the years ahead.

Unfortunately since 2013, the group’s normalised earnings per share have shrunk by nearly 50%. The payout is now only just covered by EPS (based on fiscal 2017 numbers). 

Going forward, City analysts are not expecting a sudden recovery. For 2018, EPS of 12.8 are forecast, but these numbers don’t take into account any possible customer attrition for when the government’s price cap on standard variable tariffs (SVT) arrives at the end of 2018.

Considering all of the above, I reckon the company is today in a similar position to the one it was in towards the end of 2014. Centrica is facing pressure from all sides and dividend cut may be the only choice management has to restore confidence. 

With this being a case, I’m avoiding Centrica’s 8.1% dividend yield.

A better growth buy

Centrica’s future is uncertain, but one company I’m more positive on the outlook for is Polypipe (LSE: PLP). Manufacturer of plastic piping systems, Polypipe’s business is so boring it is unlikely to ever attract the same (mostly negative) publicity as Centrica. I reckon this makes the shares much more attractive because management can focus on growth, rather than PR.

And over the past five years, Polypipe has produced some impressive growth. Since 2012, earnings per share have grown at a compound annual rate of 19% as net profit has more than doubled. Acquisitions have formed a significant part of the growth strategy. For example, today Polypipe announced the acquisition of Permavoid Limited, a specialist designer and supplier of surface water management solutions. 

Analysts believe organic growth, coupled with a steady stream of bolt-on acquisitions, will help Polypipe grow EPS around 10% this year, and 6% in 2019. Although I wouldn’t rule out upward revisions to these numbers as they currently exclude any future deals.

For a company with a growth record like Polypipe, I would expect the shares to trade at a premium valuation. However, they’re changing hands at just 13 times forward earnings which, to my mind, undervalues the business. A dividend yield of 3.2% is also on offer, covered 2.4 times by EPS. 

So, if you’re looking for a replacement for Centrica in your portfolio, Polypipe could be a good candidate.

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Elsewhere, FTSE 250 plastic piping specialist Polypipe (LSE: PLP) reported half-year results this morning and said its performance was “driven by continued strong growth in new housebuilding.” Its shares are up 5.6% at 375p, as I’m writing, and I’ll come back to this stock after first looking at Persimmon’s prospects.

History

I turned bearish on housebuilders last autumn, rating Persimmon a ‘sell’ in October at 2,800p and again in January at 2,710p. With the shares now down to 2,470p, are today’s cheap earnings rating and whopping yield simply too tempting to ignore?

Housebuilders have enjoyed almost a decade of booming profits. The problem for investors in this historically boom-and-bust sector is that the market begins to price-in the next bust even while fundamentals appear robust. Back in February 2008, Persimmon posted a record profit of £414m and was confident that there remained “an underlying demand and desire for new homes.” However, the shares had already lost 50% of their value by then and the P/E had fallen to 5.5. A year later, the company posted a £625m loss and ditched the dividend. The peak-to-trough decline in the share price over two years was more than 85%.

Things that can’t go on forever, don’t

The market correctly predicted the last housebuilding bust and now appears to be starting to price-in the risk of the next. I see potential for demand and pricing for new homes to plummet. Interest rates are now entering a rising cycle (not generally good for housbuilders), there’s political risk (e.g. an early withdrawal of the government’s Help to Buy scheme) and Brexit presents a range of potential headwinds (availability of skilled labour and rising labour and materials costs) and even the risk of a full-blown economic recession.

Now, there may not be a perfect storm, but the scale of the likely collapse of housebuilders’ share prices should there be, leads me to take a cautious view. I believe selling Persimmon and banking profits at this stage is a prudent course.

Exposed pipework

Polypipe manufactures plastic piping systems for heating, plumbing, drainage and ventilation. It has some geographical diversification (little more than 10% of first-half revenue came from outside the UK) and it supplies the commercial and infrastructure sectors as well as residential. Well over half of H1 revenue and two-thirds of operating profit came from residential.

Residential revenue was 5.9% higher than in the same period last year, with new housebuild more than offsetting weakness in the repair, maintenance and improvement markets. Revenue in commercial and infrastructure was down 6.6%. The company expects the outlook to remain mixed in the second half but to deliver full-year results in line with expectations.

At the current share price, the forward P/E is 13.2, based on forecast 5% earnings growth, and the prospective dividend yield is 3.1%. For a company with significant indirect exposure to the risks faced by Persimmon, I don’t see the earnings rating as offering anything like a big enough margin of safety. As such, I also rate this stock a ‘sell’.

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That has seen it shed more than 35% of its value in less than six months. But despite this setback, I remain convinced in its ability to generate splendid returns for long-term investors.

Before I continue lauding Boohoo, however, I would like to bring your attention to a hot growth stock making headlines in Tuesday business: Polypipe Group (LSE: PLP).

Strong outlook

Polypipe, which is one of the continent’s leading manufacturers of pipes and plumbing apparatus, announced today that revenues jumped to a record £411.7m in 2017, up 6.3% year-on-year. This propelled underlying pre-tax profit 7.9% higher to £65.7m.

Despite a difficult time for the UK construction industry amid huge economic and political uncertainty, the FTSE 250 firm still managed to deliver an 8.1% sales improvement in its home marketplace (Polypipe sources almost 90% of revenues domestically).

Driven by strong demand from the housebuilding segment, sales at its Residential Systems division jumped 10.3% from 2016 levels, growing ahead of the broader market and offsetting difficulties in the repair, maintenance and improvement (RMI) market.

And Polypipe believes the outlook remains good, commenting: “Fundamentals in Residential Systems segment continue to be strong, driven by the new housebuild sector, but UK RMI [is] likely to remain challenging.” Furthermore, it added: “[Our] commercial and Infrastructure project pipeline remains encouraging, although project delays [are] impacting short-term performance.”

Bet the house on it

Polypipe has a long history of earnings growth thanks to the strength of the British homebuilding sector, and stable conditions here are likely to keep the bottom line swelling, so say City analysts.

A 6% rise is forecast for 2018, and another 7% advance is forecast for next year. Yet despite its robust outlook, Polypipe can be picked up on an ultra-low forward P/E ratio of 13.7 times.

What’s more, the pipebuilder’s strong profit prospects and improving balance sheet are expected to keep dividends improving at quite a lick (it hiked the full-year payout 9.9% in 2017 to 11.1p). Rewards of 11.8p and 12.7p are forecast for 2018 and 2019, respectively, resulting in chubby yields of 3% and 3.2%.

Fashion fave

Now for Boohoo. It may not be a dividend carrier, unlike Polypipe, nor does it pack the same sort of value either, with the company dealing on a forward P/E ratio of 47.1 times. However, the chances of it continuing to deliver knockout earnings growth still makes it worthy of serious attention, in my opinion.

Indeed, City analysts are expecting it to continue its record of double digit percentage improvements with rises of 25% and 27% in the years to February 2019 and 2020.

Demand for Boohoo’s fashion offer continues to rip higher across the world and, as a result of total revenues booming 93% at constant currencies in the four months to December to £228.2m, the online business revised upwards its sales forecasts for the second time in four months. And I expect plenty more sales joy to come as the company invests heavily to harness the global e-commerce boom.

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According to the firm’s figures for 2017, pre-tax profit for the year increased by 17% to £35m and underlying profit rose 10% to £68m, thanks to a 14% increase in revenues to £523m, helped by contributions from acquired companies Bilco and Giess. Favourable exchange rates also contributed to rising profitability.

And following 2017’s strong performance, management is not slowing up. Today, Tyman announced one of its most significant acquisitions yet, a $101m deal to buy US window and door hardware firm Ashland Hardware. To help fund the deal, it’s issuing 17.8m shares.

Expanding overseas 

The buyout of Ashland should accelerate Tyman’s growth in the US considerably. Its US-based AmesburyTruth division, which Ashland will join, grew sales at 15% to £332.7m last year, and Ashland will add another $67m to this total. For 2017, the US-based business recorded revenues of $67m and adjusted earnings before interest, tax, depreciation, and amortisation of $11m. This deal should help accelerate growth in 2018, and it shows just how committed management is to growing the business over the long term. 

Tyman has a history of expanding revenues through acquisitions. This approach has helped the company grow earnings per share at a rate of 12% per annum over the past five years. Management is expecting “a further year of profitable growth in 2018,” and City analysts have pencilled in earnings per share growth of 8%, although this doesn’t include gains from the acquisition announced today.

With this being the case, I believe the company’s current valuation of 10.8 times forward earnings is way too cheap. If management can continue to grow earnings at a double-digit rate every year, then its multiple looks to undervalue Tyman’s future growth potential significantly. As well as the bargain basement valuation, the shares also support a dividend yield of 4%.

Too cheap to pass up? 

Tyman isn’t the only cheap growth star I’ve got my eye on today.

Plastic piping systems manufacturer Polypipe (LSE: PLP) has seen its earnings grow at a compound annual rate of 34% per annum over the past five years — a growth rate more suited to a tech company rather than dull pipe producing business. 

City analysts are expecting the firm to report earnings growth of 22% for 2017, followed by an increase of 8% in 2018. However, this doesn’t include the impact of any potential acquisitions that may be inked over the next nine months.

Despite the historical earnings growth Polypipe has been able to achieve, the shares look relatively cheap, trading at a forward earnings multiple of only 13.6 at the time of writing. For most construction businesses, this valuation might be considered appropriate. But considering Polypipe’s record of growing earnings, it seems too cheap to pass up. What’s more, as CEO Martin Payne commented at the end of November, “the group continues to deliver strong organic growth ahead of the overall UK construction market, demonstrating the resilience of its balanced exposure to the different sectors within that market.“

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Polypipe Group

Polypipe Group (LSE: PLP) is a UK-based manufacturer of plastic piping and energy-efficient ventilation systems for the residential, commercial, civil and infrastructure sectors. Shares in the £748m market-cap group have enjoyed a strong run over the last year, rising from 285p to 399p today, a gain of 40%. Does that rule out further gains in future? I don’t believe so.

Over the last three years, Polypipe has demonstrated impressive momentum. Revenues have increased from £301m to £437m, while adjusted earnings per share have climbed from 10p to 25p. This year, City analysts expect a top-line figure of £466m and earnings of 27p.

A trading update released this morning revealed that the group is on track to achieve management expectations for the full year. Revenue for the 10 months to the end of October was up 8.2% (7.1% on a like-for-like basis) on last year. The group said that it saw “strong organic growth” in its UK residential and mainland Europe segments, which were both assisted by “relatively buoyant” new house building activity. Performance of the mainland Europe commercial and infrastructure systems segment was particularly impressive, with revenue growth of 19.9%. Chief executive Martin Payne commented: “The Group continues to deliver strong organic growth ahead of the overall UK construction market, demonstrating the resilience of its balanced exposure to the different sectors within that market.”

While the threat of a property slowdown in the UK adds an element of risk here, on a forward looking P/E of 14.8, with a prospective dividend yield of 2.7%, the investment case remains attractive, in my view.

FDM Group (Holdings)

Another amazing performer over the last 12 months has been FDM Group (LSE: FDM), which provides IT consultants to its clients, that assist with business analysis, data and operations services and cyber security.

I last covered the stock in late July, when the group had released strong half-year results that sent its share price surging 10%. At the time, I said: “I’m going to keep a close eye on FDM Group shares in the hope that a pull-back creates a more attractive entry point.” Unfortunately, the shares have kept rising. Indeed, they’re now up over 70% in a year. That means £1,000 invested a year ago would have generated a profit of £700. 

Like Polypipe, this is a company with strong momentum. City analysts expect a 22% increase in revenue this year, and forecast a 13% rise in earnings per share to 29.2p. However, after a 70% one-year gain, is there any value left in the stock at the current price? 

FDM currently trades on a punchy forward looking P/E ratio of 32.9. While I don’t think that valuation is entirely unreasonable given the company’s growth prospects and exposure to the tech sector, I’m going to continue to keep the stock on my watchlist for now in the hope of a meaningful correction.

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