Growth is one of the most compelling components of value when it comes to shares. If the underlying businesses represented by the shares we buy have no growth prospects, we can end up not buying good value at all.
Tempting-looking value indicators may instead just lead us to buy ‘cheap’, which can sometimes work out to be a mistake.
Growth in the FTSE 100
Right now, I reckon pharmaceutical firm Shire (LSE: SHP) and insurance company Prudential (LSE: PRU) from the FTSE 100 both have decent forward growth prospects backed by impressive trading records. Today, I’m taking a closer look to see if these firms offer investors good value too.
I can’t argue with their recent trading records. Over the past four years to December 2015 Shire has driven up its annual revenue by 50%, operating profit by 28%, and net cash from operations by 117%. Over the same four-year period Prudential advanced its revenue by 43%, operating profit by 62%, and net cash from operations by 46%.
Those figures demonstrate impressive business growth. In response, Shire’s share price is up 130% since the beginning of 2012 and Prudential has risen 120%. That strikes me as decent returns for investors holding through the period, and I think it shows how important a firm’s growth prospects can be to an investor’s initial assessment of value. The big question is, can these two firms continue to grow their businesses from here?
Positive outlooks
City analysts following these two firms are optimistic. They see Shire increasing earnings per share by 87% this year and 19% during 2017. They think Prudential’s journey will be a little more bumpy with earnings per share dipping by 9% this year before rebounding by 13% in 2017.
Shire’s ongoing progress comes from organic growth and acquisition activity. During 2016 the company completed a deal taking over US biotechnology company Baxalta. Shire’s chief executive said with the recent second-quarter results statement: “While closing this transformative deal and making significant progress on integration, we have delivered strong double-digit revenue growth from our legacy Shire franchises, and for the first time our results reflect a significant contribution from the legacy Baxalta franchises.”
The Baxalta deal and an earlier acquisition of Dyax at the beginning of the year look set to make big contributions to forward growth. I reckon shire’s cash-generating business will go on to enable more earnings enhancing deals in the future.
Meanwhile, Prudential’s chief executive said in August: “The group’s performance is led by double-digit growth in Asia … In the US and the UK, we continue to successfully manage the effects of market turbulence. The quality of our earnings, geographic diversity and strong balance sheet position us well to grow over the long term.”
At today’s share price of 5,118p Shire trades on a forward price-to-earnings (P/E) ratio of just over 13 for 2017, and at 1,382p Prudential’s forward P/E rating is 10.6. With both firms making positive noises, it suggests growth could have further to run.