One bargain growth stock I'd buy ahead of Sirius Minerals plc

Sirius Minerals

Identifying stocks with big growth potential isn't always easy. But today I'd like to take a look at a company I believe has the potential to deliver steady long-term growth.

Clinigen Group (LSE: CLIN) is one of the biggest companies with an AIM listing, with a market cap of £1.3bn. Despite the AIM link, it's a profitable, dividend-paying company with sound finances.

The group provides a range of specialist pharmaceutical products and services. These include sourcing and managing medicines for use in clinical trials, and supplying unlicensed and pre-approval medicines to hospitals for use in urgent cases. The company also has its own portfolio of niche medicines for rare or life-threatening diseases.

Rapid growth

This is a specialist business which needs expert management. But the group's sales have grown from £35m in 2011 to £339m last year. Profits have also risen rapidly, growing by an average of 25% per year since 2011.

The group's growth is the result of a mix of organic rises and acquisitions. Today saw the firm announce its latest acquisition. It will buy Quantum Pharma (LSE: QP) in a £150m cash and share deal which values the smaller company at 82p per share.

Quantum operates in a similar area to Clinigen, developing and supplying unlicensed and specialist medicines to UK pharmacies. Management expects to be able to deliver "immediate financial benefits" and says that there is "a sound cultural fit" between the two businesses.

My calculations suggest that Quantum should add around 12% to Clinigen's earnings per share over the next year, before any cost savings. That puts Clinigen shares on a forecast P/E of 20. I think that's reasonable, given the group's track record of growth. I'd remain a buyer at current levels.

Taking the long view on Sirius

Short-term stock traders with good timing were able to double their money on Sirius Minerals (LSE: SXX) between April and June. But the shares have fallen by 24% since peaking in June.

Is this a buying opportunity for long-term investors wanting a stake in one of the UK's largest ever mining projects? Let's take a look.

Even by the standards of the mining industry, Sirius is a long-term project. The group doesn't expect to start any production until late 2021, and isn't expected to reach its initial production target until 2024.

Figures used by the firm's management suggest that the mine has a net present value (NPV) of $15.4bn. This figure represents the value today of expected future cash flows from the mine, using current commodity prices over an expected 50-year lifespan. The production level used in these calculations is 20m tonnes per annum, twice the 10Mtpa level targeted for 2024.

In other words, there's an awful lot of guesswork involved in calculating these figures, which reflect expected earnings over five decades.

At this stage, I don't think we have any way of knowing how much of a commercial success this business will be. But at 25p per share, Sirius has a market cap of £1.2bn ($1.5bn). In my view, this isn't cheap enough to reflect the risks facing equity investors.

I suspect there will be better buying opportunities in the future, when the mine is closer to completion, and offers greater visibility of likely earnings. I'd invest elsewhere until then.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Clinigen. 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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