Investors face a lot of risk with Sirius Minerals and Bitcoin because of the absence of an underlying business producing earnings. Instead of speculating on those two, I’d rather invest in a fast-growing business that’s generating cash flow and earnings, such as Applegreen (LSE: APGN).
The firm describes itself as a convenience food and beverage retailer, which it operates alongside its petrol forecourts and motorway service areas. The business has been growing fast and we can find the company’s outlets in Ireland, the UK and the US.
Fast growth in earnings
The strategy involves keeping fuel prices low “to drive footfall” to the stores. A multi-year record of rising revenue, cash flow and earnings suggests the firm’s approach is working. But growth has been driven by acquisitions as well by organic advances and, at the end of 2018, Applegreen completed a large deal that gave it a 50.01% majority stake in the UK’s Welcome Break service area business.
Today’s half-year results report reveals that overall constant currency revenue rose 70% compared to the equivalent period last year. But there’s been a fair degree of organic increase too, with like-for-like fuel revenue moving 8.4% higher and like-for-like non-food revenue increasing by 5%. Adjusted diluted earnings per share shot up almost 36%, and the directors pushed up the interim dividend by 4.8%.
However, you probably won’t be attracted to this stock for its dividend alone. The current share price throws up an anticipated yield for the current trading year of just below 0.4%. But, in fairness, the dividend payment is likely to be covered by earnings around 16 times. So it seems clear the directors are prioritising investment for growth over dividends for shareholders, which is quite normal for growing businesses.
Pushing growth in America
We can read in today’s report that the integration of the Welcome Break business is “going well” and the directors have identified “significant” extra synergies which they expect to benefit the finances by the end of 2021. Meanwhile, in the first half of the year, 11 sites were added to the estate in Ireland and the UK and, just before the end of the period in June, Applegreen acquired 46 sites in the US.
There’s a focus on driving growth in the US right now, according to the report and, in August, the firm announced the acquisition of a minority stake in Connecticut Service Plazas. The pace of expansion is brisk and, at the end of June, there were 483 sites altogether, up from 368 a year earlier.
The enterprise value around £1bn compares to a market capitalisation of about £538m, suggesting the firm carries a chunky debt-load. That’s common with highly acquisitive enterprises, but profits from those synergy gains down the road could help justify the firm’s expansion programme.
The forward-looking earnings multiple for 2020 runs near 14, which isn’t a bargain valuation, but fast-growing companies rarely sell at bargain prices. I’m more tempted to pick up a few Applegreen shares than have a punt on Bitcoin or Sirius Minerals right now.