Why I'd dump Royal Dutch Shell plc to buy this stock

With the share price barely moving this morning, it looks like the market was expecting the good news in the interim results report from Luceco(LSE: LUCE).

The fast-growing LED lighting and electrical accessories manufacturer and distributor delivered a revenue increase of almost 26% compared to a year ago, adjusted earnings per share nearly 43% higher and a reduction in net debt around 46%. To crown these achievements, the directors declared a virgin interim dividend of 0.8p representing around 20% of earnings for the period.

Low-cost manufacturing

Since opening a low-cost product development and manufacturing facility near Shanghai during 2009 to complement the UK operation, Luceco has emerged as a business with keen cost control responding well to rapid changes and opportunities in the market. I think today's results demonstrate that the firm is doing many things right.

The company supplies its Luceco, BG, Masterplug and Ross branded goods to trade distributors, retailers, wholesalers and project developers with a little over 83% of revenue originating in the UK. Yet the firm has ambitions abroad and is penetrating the markets in Europe, the Middle East, Asia Pacific and Africa. Although all product lines are showing growth, the directors highlight the opportunity in the market for light emitting diode (LED) lighting products, which is gaining traction around the world. Today's results show a 23% uplift in revenue under the LED lighting category.

An exciting growth story

You don't need to bull up the company's story because it describes itself as "an exciting growth story, underpinned by strong competitive advantages thanks to its fully integrated model and established routes to market". From what I can see, the claim is true because city analysts following Luceco expect earnings to lift 20% this year and 20% during 2018.

The directors are optimistic and expect the strong order book and a robust pipeline of new product launches to drive its ambitions for market-share grab at home and abroad. I would rather take my chances with the firm than to invest in a cyclical giant such as Royal Dutch Shell(LSE: RDSB).

At today's share price of 2,192p, the firm's forward price-to-earnings ratio sits just below 15 for 2018, which must anticipate a fair bit of forward growth, otherwise it looks high to me. Shell is busy integrating its takeover of BG and City analysts expect earnings to bounce back around 200% this year, although 2018's anticipated increase is modest at 13%.

A glaring vulnerability

On the surface, the dividend yield looks attractive, running near 6.6% for 2018. But forward earnings will likely cover the payout just once, which I think makes the dividend look stretched. Back in July, chief executive Ben van Beurden told us in the interim results statement that the oil price of around $50 per barrel led to "resilient" cash generation over four consecutive quarters, and over 12 months, cash flow from operations of $38bn covered the cash dividend and reduced gearing to 25%.

However, I think the way Mr Van Beurden links cash flow and the dividend payment to the price of oil underlines the firm's vulnerability to a factor that it can't control, so I'm avoiding the firm's shares.

Another tempting growth opportunity

Luceco could light up your portfolio along with a company identified as A Top Growth Share From The Motley Fool. It's not every day that the Fool's analysts become so enthusiastic about a growth opportunity, so this one is worth digging into.

Success abroad looks set to drive the share price higher over time as an established British brand with international aspirational appeal realises its full potential. 'Right now,' looks like a great time to research this firm. You can get a copy of this report by clicking here.

Kevin Godbold has no position in any of the stocks mentioned. The Motley Fool UK has recommended Luceco and Royal Dutch Shell B. 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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