2 growth stocks for the long term
Today, I'm looking at two growth stocks with solid long-term potential.
Fundamentals
Provident Financial(LSE: PFG) isn't a household name, but you may be familiar with some of its advertised brand names, such as Vanquis, Moneybarn and Satsuma Loans.
Key to the company's success is its growing distribution scale and leading digital innovation. Led by robust demand for short-term loans, Provident is seeing solid growth in customer numbers and in its loan book. Despite the uncertainty caused by the vote to leave the European Union, last year, customer numbers and loan receivables at its main business, Vanquis Bank, expanded 8.7% and 13.8%, respectively.
But critics say that Provident's growth is unsustainable because the company is particularly exposed to UK consumers at a time when real household disposable incomes come under pressure from rising inflation. Growth is slowing already but I don't expect a hard landing, rather a moderation in its pace of growth after years of breakneck expansion.
As so often happens, the risks may have been overstated. Loan losses have so far defied earlier expectations, with the rate of impairments continuing to fall from already low levels. And unless interest rates rise sharply, which seems unlikely, loan losses are not expected to deteriorate too significantly over the next few years.
Moreover, as the big banks retreat from sub-prime lending, Provident benefits from favourable long-term fundamentals. The company is well placed to grow its market share. It has in place specialist systems to evaluate risks and select only those customers with a low likelihood of default, based both on individual characteristics and the historical data that it collects from its customers. It is also making great strides with developing the brand awareness of its online-only Satsuma Loans business, which would further expand its lending capability and boost its digital presence.
Provident shares don't seem particularly cheap with the company trading at 16.9 times its expected earnings in 2017. But, if we factor in its expected double-digit dividend growth, its shares become much more tempting. Shares in the company yield 4% right now, but City analysts expect its prospective dividend yield to rise to 4.6% by the end of this year, and 5.1% by the end of 2018.
Market leader
Also offering scope for long-term growth is plastic piping and ventilation systems company Polypipe(LSE: PLP).
Since its IPO back in 2014, operating profits have increased by an impressive 56%. And key to its success has been its position as a market leader, which allows it to enjoy imposing underlying operating margins of more than 15%. This, in turn, enables it to generate enough profits to pay for big capital investments to enable higher volume growth and fund product innovation to expand its product and service portfolio.
Due to steady tailwinds from the new-build residential market and infrastructure projects, City analysts think Polypipe still has plenty of growth to come. On average, they expect underlying earnings to rise by 20% this year, with a further gain of 8% in 2018. And on these estimates, its shares seem fairly valued as they trade at 15.8 times forecast earnings this year (falling to 14.7 times on expected 2018 earnings), against the sector average of 16.8 times forward earnings.
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Jack Tang 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.
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