Although there is more to investing than assessing a company’s valuation, it is a good place to start. Clearly, a low valuation is insufficient to merit purchase. However, a company with an attractive price and a relatively bright outlook could deliver strong capital gains over the long run. Here are two companies which appear to be cheap and yet have forecasts which suggest they are performing well as businesses.
A return to form
Merlin (LSE: MERL) now appears to be back on track after a difficult period. The tragic accident at Alton Towers in 2015 caused ticket sales at the theme park to disappoint. However, strong performance from other parts of the business, notably Legoland, meant that Merlin’s bottom line continued to grow.
Looking ahead, the company is forecast to report a rise in its bottom line of 13% in the current year, followed by further growth of 16% next year. This is significantly ahead of the outlook for the wider index and shows that Merlin’s diverse business model offers a sound platform for growth. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 1.2, which indicates its shares are cheap and could rise over the long run.
While Merlin’s 1.5% yield is hardly attractive at a time when the FTSE 100 yields 3.7%, strong dividend growth could make it a more enticing income option. Dividends are due to rise by over 14% per annum during the next two years. And since dividends are covered 2.8 times by profit, there is scope for further growth in future years.
A consistent growth stock
Given the uncertain outlook for the global economy, investors may prefer to invest in companies which offer relatively consistent growth. While diversified events, education and marketing company Informa (LSE: INF) may be a cyclical stock, its bottom line has risen in each of the last four years. It is expected to do likewise in 2017 and in 2018, with earnings growth of 14% and 6% forecast respectively for those two years.
This outlook has not caused Informa to trade on a demanding valuation. It currently has a PEG ratio of 1, which indicates that 2017 could be a prosperous year for its investors. As with Merlin, Informa has upbeat income prospects. It currently yields 3.2% from a dividend which is covered 2.3 times by profit. This could act as an additional catalyst on the company’s share price, since investors may seek companies with slightly lower yields and faster dividend growth as inflation becomes a bigger challenge to overcome during the course of the year.
Informa should also benefit from weak sterling over the medium term. It reports in sterling but much of its business is conducted abroad. This could cause an upgrade to its earnings outlook and make its current valuation appear to be even cheaper.