2 shares with 'inevitable' growth potential

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Daffodil

There's much wisdom in Benjamin Franklin's well-known utterance, "In this world, nothing can be said to be certain except death and taxes."

If death and taxation have an inevitability about them there could be a strong current of demand for services in those areas, so maybe it's a good idea to look closely at firms specialising in serving those sectors.

A clear strategic direction

Investing in companies when they are new to the stock market can work out well because the growth potential is often high. Management teams can be at their most entrepreneurial and directors keen to make their mark with good effects on growth.

On the other hand, newly listed firms often arrive without much of a trading record, which raises the level of risk. In many cases, investors need to take a leap of faith when they invest in new-to-the-stock-market companies.

I think Tax Systems(LSE: TAX) looks attractive and the firm delivered its full-year results today. The company describes itself as a supplier of corporation tax software and services and was admitted to the FTSE AIM market during July 2016.

Previously, the firm had been an investment company on the lookout for businesses to acquire with opportunities for growth in the technology sector. It was the acquisition of Tax Computer Systems Limited in July that led to the firm's transition to Tax Systems plc and what looks like a clear strategic direction.

Automating the tax process

Tax Systems aims to deliver end-to-end solutions for tax departments, with as much automation as possible. To achieve this automation, the firm plans on developing in-house software systems and is also on alert for acquisitions such as the post-year-end takeover of OSMO Data Technology Limited, a provider of automated data extraction software.

The directors are optimistic about the firm's future. Meanwhile, at the current share price around 72p, Tax Systems trades on a forward price-to-earnings (P/E) ratio of just over 15 for 2017 based on expected earnings. 

As a growth proposition, I don't think the firm looks expensive but, because of the recent acquisition activity, borrowings look quite high at around 4.5 times revenue expected this year, which could become a problem if earnings don't take off as hoped. Nevertheless, I think Tax Systems is well worth your further research.

Taking care of dispatch

UK-focused funeral services provider Dignity(LSE: DTY) has been a steady grower, pleasing investors for more than a decade and the firm remains attractive today. Demand for the firm's services is steady, which leads to a stable record of cash generation, as you can see in the table below.

Year to December

2011

2012

2013

2014

2015

2016

Operating cash flow per share (p)

81.5

106.1

116.6

138.2

186.3

162.5


Dignity tends to grow by acquiring smaller funeral service rivals in what has been a fragmented industry. Such ongoing consolidation activity looks set to drive further progress for investors as the firm reinvests its cash flow into growth.

At today's share price of 2,504p, Dignity trades on a forward P/E ratio around 20 for 2017, which seems fair given the quality of the company's business and its consistent cash flows.

A further opportunity

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.