Should you pile into this FTSE 250 growth stock after today’s 9% rise?
At one stage on Wednesday morning, Aveva Group(LSE: AVV) was the FTSE’s biggest climber of the day with a 9% gain. The share price had dropped back a bit by the afternoon, but it was still ahead 5%, so what’s happening?
On the morning of its latest Capital Markets Day, the provider of engineering and industrial software gave us an update on its current trading. The firm reckons its full-year outlook is still in line with expectations, and it expects “to grow its underlying software business in excess of market growth rates.”
In addition, Aveva aims to get its adjusted EBIT margins up to 30%, and intends to achieve that through a combination of revenue growth, cost savings, and focus on high margin revenue.
Highly valued
Aveva shares have been flying this year, and with a background in software myself I do like to see a solid success story. But my problem is, I just don’t understand the current valuation of the shares. The reverse takeover of Schneider in March made forecasts even less meaningful than they can be at the best of times, but we’ve had plenty of time for analysts to update their stance since then… and I still don’t get it.
Based on the consensus for the year to March 2019, we’re looking at a forward P/E of 35. And that would drop only as far as 30 on 2020 forecasts. There’s clearly a lot of growth expectation built into that valuation, but with very modest EPS predictions, I just don’t see where it’s going to come from.
Turnaround
Elsewhere in the FTSE 250, over at Balfour Beatty(LSE: BBY) I’m seeing a tempting recovery prospect. I know the construction business is tough, and Balfour Beatty was recording big losses just a few years ago, but its turnaround plans do seem to be bearing fruit.
First-half results showed a very healthy rebound in pre-tax profit, and the balance sheet was looking a lot healthier as the firm was able to boast average net cash of £161m in the period.
Balance sheet improvements have continued since, and on Wednesday we heard of the completion of the sale of the firm’s 50% stake in Fife Hospital. It sold for £43m, above the expected valuation, and resulted in an expected profit of £22m.
Dividends
Another sign of the company’s new sustained liquidity came from a boost to its interim dividend. We are only expecting a dividend yield this year of 1.7%, but it would represent a third more cash than in 2017. And a similar expected lift in 2019 would take the yield to 2.3%, well over three times covered by earnings.
After last year’s big EPS recovery and this year’s expected pause, it might take a little while yet for the share price to pick up seriously. But with a 2019 forward P/E of 13 and PEG of 0.6, I see a profitable future for Balfour Beatty investors.
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Alan Oscroft has no position in any of the 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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