Are these today's top growth buys?

The Motley Fool
Jimmy Choo
Jimmy Choo

Today's results include some surprising numbers from three mid-cap stocks. In this article, I'll take a closer look at the growth outlook for these firms.


Selling could boost growth

Manufacturing group Essentra (LSE: ESNT) will sell its Porous Technologies unit for £220m to US firm Filtration Group. The deal will reduce Essentra's debt levels significantly and allow the group to focus on core growth areas of its business.

Shares in the group have fallen by 38% so far this year, thanks to a profit warning in June. Profits will take another hit from the loss of the Porous Technologies business, which generated an operating profit of £17.6m over the last 12 months. This represents about 17% of Essentra's reported operating profit for the last year.

However, I suspect that the impact of this loss will be partly offset by the benefits of lower operating costs and reduced debt.

In my view, Essentra remains a hold. I estimate that the shares will trade on a forecast P/E of 12-14 after the sale, with a prospective yield of about 4%. Essentra has good growth prospects elsewhere -- the shares could perform well from here.

Profits up at fashion firm

Luxury shoe retailer Jimmy Choo (LSE: CHOO) said that sales rose by 9.2% to £173.1m during the first half of the year. The firm's adjusted operating profit rose by 13.7% to £21.6m.

However, because 89% of sales were made outside the UK, these figures were given a big boost by the recent slide in the pound. Measured at fixed exchange rates, sales rose by a more modest 3.8% during the first half.

Sales trends in Asia were encouraging. Jimmy Choo reported double-digit like-for-like growth in China and strong growth in men's sales. Men's shoes currently account for just 8% of Jimmy Choo's sales, but the firm believes this figure could rise "well into double digits" in coming years.

Jimmy Choo shares are up by 3% at the time of writing, putting them on a 2016 forecast P/E of 19, falling to 16 for 2017. The shares have fallen by 30% over the last year, but earnings growth is expected to accelerate next year. Now could be a good time to pick up a few shares.

Mining spin-off digs up cash

Mining group South32 (LSE: S32) reported a loss after tax of $1.6bn last year, due to non-cash writedowns on the value of its assets. The firm's underlying earnings fell by 76% to $138m. However, the situation may not be as bad as these figures suggest.

South32's profits have fallen as a result of weak commodity prices. But market conditions have stabilised this year. South32 is profitable at current prices and generated adjusted free cash flow of $597m last year. This enabled the group to reduce debt and finish the year with net cash of $312m.

The firm has declared a maiden dividend of 1 cent per share, giving a yield of about 0.6%. Analysts' forecasts suggest that underlying earnings will rise from 2.6 cents to 6.9 cents per share in 2017. This puts the stock on a forecast P/E of 22.

I'd say that South32 is priced fairly at the moment, but further gains could follow as the market recovers, or as a result of takeover or acquisition activity.

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