2 forgotten stocks with serious growth potential

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Dairy Crest

Dairy Crest Group(LSE: DCG) has struggled lately, its share price standing at roughly the same level as two years ago. Many investors may have overlooked it as a result, but this £787m business still has plenty to offer investors.

Country living

Dairy Crest owns some of the best known brands in the UK dairy sector, notably Country Life and Clover, and Britain's favourite cheese, the now ubiquitous Cathedral City. What it doesn't actually sell is milk, having completed the sale of its dairies operations to Germany's Muller for £80m in 2015.

Chief executive Mark Allen is keen to push into the lucrative global baby milk formula market instead, using added value dairy ingredients such as whey butter, a by-product of its spreads and cheese operations. The company hopes to make progress in China, where local product contamination scandals and the easing of the one-child rule should boost the infant formula market. Offloading milk made sense, with the company losing £143m over four years, primarily due to plunging prices.

Crest of a wave

Dairy Crest's first 12 months without dairies showed 5% growth in adjusted profit before tax to £60.6m in the year to 31 March. Revenue fell 1% to £416.6m, while profit before tax tumbled 11% to £40.3m. Allen called it "a robust performance in a tough market" with key brands performing well as he looks to build a simple, lean and responsive business of around 1,200 employees.

Growth prospects look solid and steady, with earnings per share (EPS) growth expected to remain at 3% in 2017, then climb to 5% in 2018, justifying its forecast valuation of 16.7 times earnings. The anticipated yield of 4.2% adds income to the growth story. It is covered 1.6 times and nicely supported by the strong levels of cash generated from operations, which totalled £32.8m in 2017. Dairy Crest isn't the most exciting stock on the FTSE 250 but remains a good bread and butter portfolio holding.

Digital growth story

IT infrastructure services specialist Computacenter (LSE: CCC) is a very different beast. For a start, it has delivered far more exciting share price growth, rising 187% over the past five years. It continues to perform strongly with first-quarter group revenue up 16%, or 9% on a constant currency basis. UK revenues did fall 1%, handily offset by an increase of 6% in French revenues, and 23% in Germany.

It is benefitting from the trend to digitalise workplace operations, which has boosted its professional services and supply chain businesses in particular. This has helped offset the squeeze as customers battle to reduce their long-term support costs. However, this £1bn FTSE 250 company has the strength to turn this to its advantage, and even use it as an opportunity to take market share from rivals who cannot compete so well on costs.

Germany calling

Analysts foresee a slowdown in EPS growth, down from 15% in 2016 to a forecast 4% in 2017, and 1% in 2018. A forecast valuation of 14.4 times earnings reflects this moderation. The forecast yield of 2.6% disappoints in these circumstances, even if it is nicely covered 2.6 times. 

Barclays recently hiked its profit forecast for Computacenter by 5%-6%, largely based on increased expectations of German demand, and suggested that investors could even benefit from a possible cash return. Certainly the company could improve on last year's 2% dividend hike to 16.3p. 

Both companies are worth further investigation but I reckon we have an even more exciting growth prospect for you right here.

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Harvey Jones 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.