In today’s article I’ll look at three of this year’s top FTSE 350 performers, Betfair Group (LSE: BET), Greggs (LSE: GRG) and OneSavings Bank (LSE: OSB).
Why have these firms been so successful this year, and can they deliver another blockbuster performance in 2016?
Betfair
With its shares up by 132% so far this year on the back of strong earnings growth, Betfair seemed to have proved the wisdom of focusing on online gambling only.
However, it’s all change for the firm in 2016. Betfair’s planned merger with Irish bookmaker Paddy Power is expected to complete in the first quarter of the new year.
Despite the challenges being faced by other big high street bookmakers, the City seems keen on this merger. Shares in both companies have climbed by around 25% since the deal was announced.
It’s hard to compare this year’s standalone performance with how a combined ‘Betty Power’ business might perform next year. However, it may be worth noting that both companies, operating independently, are expected to increase earnings per share by around 20% next year.
Offsetting this appeal is the reality that both companies also trade at more than 30 times forecast earnings and offer dividend yields well below 2%.
The merged business might deliver further gains over the next few years, but this steep valuation suggests a lot of growth is already in the price.
Greggs
Are investors on safer ground with coffee and sausage roll provider Greggs, whose shares have risen by 66% so far in 2015?
Underlying this stock market performance has been a solid operational performance. Like-for-like sales rose by 5.6% during the first nine months of the year and the firm’s increasing focus on providing café facilities alongside its core bakery offering seems popular.
City analysts are keen, too and Greggs has benefited from a steady stream of upgrades. Broker forecasts for this year’s earnings have risen by 20% to 54.1p per share since January. This puts Greggs on a forecast P/E of 22, which isn’t cheap. However, Greggs’ strong track record of steady, profitable growth suggests to me that there could be further gains in 2016.
OneSavings Bank
OneSavings Bank’s business is based on the trade and assets of the former Kent Reliance Building Society. The shares are up by 67% so far this year and have doubled since the bank floated in 2014.
OneSavings’ relatively simple retail banking model and lack of legacy issues has meant that costs are low and profits high.
For example, OneSavings Bank’s cost:income ratio is expected to be 26% this year. Lloyds Banking Group, one of the most profitable of the big banks, has a cost:income ratio of 48%. Similarly, the bank’s underlying return on equity was 31% during the first half of the year, compared to 15.7% at Lloyds.
This high level of profitability means that OneSavings shares trade on three times their book value. This is quite high for a bank and means that the share price isn’t supported by the value of the bank’s net asset, unlike most larger banks.
Analysts expect earnings per share growth of 39% this year, falling to a more modest 9% in 2016. However, the shares trade on a forecast P/E of 10, and remain cheap enough to buy, in my view.