2 ‘hidden’ growth stocks hiding in plain sight

Croda International (LSE: CRDA) and Regus (LSE: IWG) have both reported impressive results today, but despite their upbeat figures, it seems as if these companies fly under the radar of most. This means they could be the perfect investment for the long term Foolish investor, in my opinion. 

Sterling boost 

Croda said today that it had delivered a record profit for 2016 after a material lift in revenue for the year. Sales rose 15% to £1.2bn from £1.1bn last year thanks to a boost from sterling’s depreciation. According to management, the improvement in revenue was driven by the group’s Incotec business, innovation and progress in high value markets. Adjusted operating profit increased to £298m from £264m. At constant currency, adjusted operating profit rose 4.6%, and adjusted pre-tax profit gained 4.8%.

While these headline figures are impressive, they hide the company’s hugely impressive business metrics, which are some of the best around. Croda’s return on sales for the year was 24% and return on invested capital was 19.3%. Few companies manage to generate a return on invested capital of more than 10% so this number stands out. 

Heading into 2017, Croda’s management is excited about the future. The business is refocusing on high margin, high-growth products, which should mean profits continue to grow at a steady clip over the next 12 months. After earnings per share growth of 14% for 2016, City analysts have pencilled in growth of 8% for 2017 and a further 7% for 2018 extending Croda’s already impressive growth record. The shares currently trade at a forward P/E of 19.7 and support a dividend yield of 2.5%.

High margin, low cost 

Shares in Regus are flying today after the company unveiled an impressive 34% increase in underlying earnings per share for the year ended 31 December 2016. During the period group revenue increased 5.5%, and underlying operating profit increased 14% as overheads fell 13%. Thanks to recent cost saving efforts overhead costs as a percentage of revenues are now 11.7%. 

Off the back of these impressive figures, management has decided to hike the company’s full-year dividend payout by 13% to 5.1p.

Landmark year 

2016 was a transformational year for Regus. The firm renamed itself International Workplace Group and rolled out several new initiatives to maintain growth in an increasingly digital world. These initiatives, which include ideas such as co-working spaces, are expected to drive growth over the next few years as the company continues to invest in its offering. 

City analysts are forecasting earnings per share growth of 21% for 2017, adding to last year’s 35% expansion. Further growth of 14% is predicted for 2018. If Regus meet these targets, the group will have nearly doubled earnings per share in the short space of three years.

Considering Regus’ historical growth, even after today’s gains, the shares look cheap to me at current levels. Based on 2016’s numbers Regus trades at a forward P/E ratio of 17.6, but this valuation will fall to just 12.4 by 2018 if the company manages to hit City growth targets. This cheap growth makes the company a hidden growth stock.