Is this 20%+ riser a must-have after smashing expectations?
Finding a stock that has risen by over 20% in one trading session and yet has more upside isn't easy. In fact, it's a rare find, but one stock appears to fall into that category today. It's among the day's biggest risers after beating expectations and looking ahead, its valuation and forecasts indicate that further growth is very much on the cards.
The company in question is audio-visual and document solutions distributor Midwich (LSE: MIDW). Its trading momentum has continued in the second half of the year, with the company having benefitted from a continued weakness in sterling. All of its divisions have performed well and delivered growth, with its overseas business in particular performing strongly. Furthermore, there has been a better than expected contribution from its most recent acquisition Holdan.
As a result of its improving performance, the company now expects to beat guidance for the full year. It anticipates that revenue for 2016 will be around £370m, which is 18% up on the previous year. Exchange rate movements account for 3% of this growth, which shows that the business is performing well on an underlying basis. Due to this strong top line performance, as well as margins which are in line with expectations, profitability should be comfortably ahead of previous expectations.
A bright future
Of course, Midwich's performance contrasts with that of sector peer Capita(LSE: CPI). While the former is expected to record a rise in its bottom line of 12% this year, followed by 8% in the following year, the latter is forecast to post a fall in earnings of 6% in the current year. Therefore, it seems as though Midwich could prove to be a strong performer during the course of 2017. And since it trades on a price-to-earnings growth (PEG) ratio of only 1.5, it appears to have significant upside potential as it benefits from a sound strategy and improving business model.
But Capita also has appeal. It's expected to return to a growing bottom line in 2018, when its earnings are forecast to rise by 4%. Furthermore, it trades on a price-to-earnings (P/E) ratio of only 8.7, which indicates that it offers excellent value for money as well as a wide margin of safety. And with a yield of 6.4% from a dividend which is covered 1.8 times by profit, it remains a very attractive income stock. In fact, its yield beats Midwich's yield of 4%, which is covered 1.7 times by profit.
As such, both stocks appear to be worthy of purchase at the present time. Midwich looks the more likely to rise in the near term as investor sentiment could improve significantly after today's positive update. However, Capita has strong long-term growth potential and with its superior size, scale and diversity could prove to be the better performer in the coming years.
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Peter Stephens owns shares of Capita Group. 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.