2 top FTSE 250 growth stocks I'd buy on the dip
Ever found yourself at an airport or railway station, dying of thirst or ravenous with hunger and balked at the high prices of bottled water or a sandwich, but bought them anyway out of desperation? Well, if you have you've probably been lining the pockets of one of my favourite companies, SSP Group (LSE: SSPG).
SSP operates convenience outlets and restaurants for the likes of Starbucks, Burger King and a range of local brands at travel locations across world. And business has been booming for the company as H1 results released this morning illustrate. During the period, year-on-year sales grew a whopping 19.6% to £1bn at actual exchange rates and at a still-very-strong 8.1% in constant currency terms.
Growth was led by both new outlets opening, particularly in America, and like-for-like growth that reached 2.9% across worldwide operations. In addition to top-line growth, SSP has spent the past few years assiduously focusing on keeping costs low as a percentage of sales. This has led to significant improvements in profitability, with operating margins rising 30 basis points in the past half year alone to stand at 3.7% at period-end.
The bulk of the company's sales and profits still come from the UK and Europe, but management is making a big push into the extremely lucrative North American market as well as India and Asia Pacific. The long-term prospects for growth in both these regions are quite attractive, which combined with high barriers to entry, rising margins and a healthy balance sheet, largely account for why shares of the company trade at a lofty 26 times forward earnings.
I love SSP Group's business model, management team and long-term growth potential but I'll be waiting for a more reasonable valuation before I begin any stake.
A surprising growth option
Another company finding captive audiences a figurative gold mine is WH Smith (LSE: SMWH), whose travel outlets are providing all of the overall company's growth. In the six months to February, high street same-store sales slumped 3% year-on-year, but overall group sales rose 2% thanks to a stellar 5% rise in same-store travel locations sales growth.
Unsurprisingly, management is focusing mostly on growing the number of travel outlets while managing the steady decline of high street locations by emphasising margin improvement rather than sales growth. This strategy is working well so far, with group earnings rising 7% year-on-year in H1 as gross margins improved by 100 basis points at high street locations and constant currency sales from travel outlets rose by 7%.
Since expanding travel outlets is relatively capital expenditure-light the company also kicks off considerable cash flow that can be returned to investors. In H1 free cash flow was £44m and over the course of the year management expects to return £100m to shareholders, split evenly between dividends and share buybacks.
With net debt at period-end just £8m, this high level of shareholder returns is quite safe. So with loads of cash flowing back to shareholders and slow but steady growth thanks to travel outlet expansion, there's plenty to like about WH Smith. But with the company's shares trading at a hefty 17 times forward earnings, I'm looking for a cheaper entry point than today's valuation provides.
One stock that is priced at a relatively bargain basement valuation is the Motley Fool's Top Small Cap of 2017. This stock trades at just eight times trailing earnings despite a stellar record of four straight years of double-digits earnings growth.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Starbucks. The Motley Fool UK owns shares of SSP Group. The Motley Fool UK has recommended WH Smith. 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.