Celebrate good times

As a quick introduction, IG Design Group designs, manufactures, and distributes a range of products for consumers to help to celebrate special occasions. These include greetings cards, gifts, not-for-resale consumables, as well as stationery.

So what’s the current state of play with IG shares? Well, as I write, the shares are trading for 85p. At this time last year, they were trading for 550p, which is a 85% drop over a 12-month period.

Looking deeper into the reason for such a fall, IG shares have tumbled due to macroeconomic pressures (which I will go into more detail about later). Many UK shares have suffered a similar fate due to soaring inflation, the rising cost of raw materials, and a global supply chain crisis that has impacted performance and returns.

To buy or not to buy

So what are the pros and cons of me buying IG shares?

FOR: Reviewing IG’s performance track record, I do understand that past performance is not a guarantee of future performance. However, it makes for positive reading. I can see that revenue and profit have grown year on year for the past four years. Coming up to date, IG released FY results for the period ending 31 March 2022 today. These results were a mixed bag. Revenue increased by 11% compared to 2021 results and IG paid a dividend of 1.7 cents. Unfortunately, margins were squeezed and profit levels dropped substantially along with net cash reserves.

AGAINST: I believe profit margins dropped due to the macroeconomic factors at play. Materials are costing more, when businesses can get hold of them due to supply chain issues, which means the manufacturing process and sales figures are affected. There is no light at the end of the tunnel regarding these issues, which is off-putting for me as a potential investor.

FOR: Economic struggles don’t last forever and no one has a crystal ball to tell when these issues may ease. If they do, and IG can return to previous profitability and growth, the shares could be a shrewd acquisition right now. On a price-to-earnings ratio of just nine, the shares look decent value for money. My investment strategy of buy and hold for the long term would come into play here. Furthermore, the shares pay a dividend, which would boost my passive income stream. It is worth remembering that dividends can be cancelled at any time, of course.

AGAINST: The current cost-of-living crisis could affect demand for what some may deem as luxury items that IG Design Group sells. Consumers will prioritise food, energy, and other essential goods over such products. This could affect IG’s performance and any future returns.

Better UK shares out there

I would not currently add IG Design Group shares to my holdings. Despite the positives noted above, the negatives outweigh these for me personally. Nobody knows when the macroeconomic issues contributing towards the cost-of-living crisis may subside. These have had a real impact on IG’s investment viability for me.

For that reason I am looking at other stocks to boost my portfolio and provide me with better, stable returns.

The IG Design share price vs supply chains

Despite what the movement of the share price would indicate, sales have continued to climb. In fact, the revenue for the first half of its latest fiscal year from March increased by 11% versus the 5% achieved in 2019. Moreover, management predicted that this growth will climb even higher over the next six months and well into its 2023 fiscal year.

Usually, this would be good news for the IG Design share price. But unfortunately, Covid-19 has other plans. The pandemic may be slowly coming to an end. However, it continues to wreak havoc on global supply chains. This disruption has significantly increased sea freight, materials, and labour costs for the business.

Consequently, operating margins during the last three months have been adversely affected. And this external problem is expected to continue well into next year. Currently, it’s unknown exactly how severe the impact will be. But management has stated that full-year operating margins could fall by 1.75%-2.25%. Given that margins for its 2021 fiscal year came in at 2.3%, this forecast indicates that profits may be about to evaporate.

With that in mind, the collapse of the share price is understandably being triggered by investors jumping ship.

There are two ways I can interpret this. One, that this is a market aberration that will iron itself out. It could even be a sell-off in shares after its share price rose 2% on the day of the results release. Two, that something in the results’ fine print is spooking investors. So what has actually happened?

Robust growth

IG Design’s revenues grew by a whole 40% for the full year ending March 31, compared to the year before. Reported numbers saw it swinging to a pre-tax profit of $14.7m from a small loss during the year before. Its reporting currency has also switched to dollars following the acquisition of CSS Industries last year. 

There are more reasons to be bullish on IG Design shares too. One of them is that even in an otherwise difficult year for manufacturers of non-essential products, it grew across all its categories. 

Its biggest segment, celebrations, which covers products like greetings cards, wrapping paper and crackers, grew by 11%. There was also a significant uptick in the craft and creative play segment as demand for at-home entertainment took off during the lockdown. 

Fortunate acquisition for the AIM stock

Besides some genuine demand increase, IG Design’s numbers have also been bumped up by its acquisition of US-based CSS industries. If the acquisition had not been made, the company’s revenues would have shrunk by 5% during the year.  In other words, I think it got lucky with the acquisition and its timing, which was just before the pandemic. But I do not want to take away from the fact that it was probably a very good strategic decision as well.

Pandemic and prices could play spoilsport

It is also quite positive about its future, but I am still cautious for companies that cater to non-essential spending. There has been a lot of government support to keep the economy going so far. But if the pandemic continues, I am not sure how long this can carry on. And non-essential spend will be the first to be hit. 

Also, it has mentioned inflation as a concern for 2022. While raw material and freight costs have risen for it already, the company said that so far, they have had limited impact. There is near consensus on rising prices across companies I have looked at recently. 

My takeaway for the IG Design share price

However, there are differing views on whether inflation will continue to rise. If it does not, IG design’s challenge will go away on its own. If it does, the company sounds confident of its ability to manage it. Also, there is a higher chance that the risk of a pandemic return is lower now. 

I think AIM stock is definitely one to consider, I do not see anything in the fine print that would worry me. 

Rather than blowing money on presents people don’t want or need, I said that these two growth stocks could be the best use for your Christmas money. I’m putting my reputation on the line here, by checking up on my own predictions. So should you be thankful for my Christmas gift?

IG Design Group

Greetings card and gift wrapping company IG Design Group (LSE: IGR) caught my eye after growing an incredible 850% over five years, while defying the retail slowdown afflicting the UK high street.

It helped that this is a global company, whose products now retail in more than 200,000 stores across 80 countries. Around 60% of its revenues come from the US and just over 20% from the UK, with the remainder split between Europe and Australia.

Since I tipped the AIM-listed stock in December last year, its share price has climbed another 23%, I was happy to discover.

Its latest results show a company that is still growing nicely, with reported revenue up 21% to £248.4m in the six months to 30 September, driven by organic growth and the £56.5m acquisition of Minnesota-based Impact Innovations. Better still, net debt fell 14% to around £86m, while the interim dividend per share increased 20% to 3p.

The IG Design Group share price’s rapid growth means the stock is relatively expensive, trading at 20.8 times forward earnings. However, it isn’t that expensive, given that City analysts are forecasting earnings growth of 98% in the year to 31 March 2020, followed by 8% the year after.

The company has also built strong, long-term relationships with retailers, which should help if we have bumpy times ahead. I would be happy to keep this in my portfolio in 2020 and beyond.

International Consolidated Airlines Group

My other Christmas stock tip was International Consolidated Airlines Group (LSE: IAG), owner of British Airways, Iberia, Aer Lingus and budget airlines Level and Vueling. I recommended it despite a bumpy 2018, when the share price was hit by Brexit, crew and air traffic control disputes, and a UK competition authority investigation into its revenue-sharing agreement with Finnair and American Airlines.

I was drawn by its incredibly low valuation of just 5.9 times forward earnings and 3.9% forecast yield, covered 4.3 times by earnings.

One year later, the €12.88bn FTSE 100 stock is down 7%, so no glory for me here. Continued strike threats knocked investor sentiment, while the group was also hit with a £183m fine following the hacking of its website.

However, it has recovered smartly from a summer slump, and is up 27% in the last three months, helped by the collapse of rival Thomas Cook. 

The IAG share price is still incredibly cheap, trading at five times forward earnings, while yielding 4.5%, with healthy cover of 3.75 times earnings.

The airline industry is tough, especially for established players, due to relentless price pressure, while factors such as terror attacks and fuel costs are beyond management control. This remains a hugely profitable company and it is certainly on the right track at the moment. I would still buy it.

Instead, I’d rather invest in companies trading well with a growth strategy that’s working, such as IG Design (LSE: IGR). The firm designs, manufactures, sources and distributes products for celebrations, gifting, stationery and creative play, and it’s been doing very well indeed!

Good trading

There’s an impressive multi-year record of rising revenue, earnings and shareholder dividend payments. And since the beginning of 2015, the share price has risen more than 780%. But with the market capitalisation today just above £500m, I reckon there’s plenty of scope for the company to further expand its international operations.

Today’s half-year results report reveals to us that in the six months to 30 September, around 60% of revenue came from the USA, 22% from the UK, 11% from Europe and the remaining 7% from Australia. Operations are truly global but there’s no denying the market in America is important. My guess is that culture across the pond is receptive to the company’s product output.

I like the business model. The company says it serves “the best” retailers around the world with a “complete” end-to-end service from design to distribution. The customer list includes some of the biggest supermarket, high street, fashion and online retailers globally. As such, IG is insulated from the operational challenges faced by its retail customers. It doesn’t really matter whether a retail customer business is an old established chain or an up-and-coming competitor. IG Design can supply them all.  

The figures in today’s report look strong. Revenue rose 21% compared to the equivalent period the year before, adjusted operating profit elevated 21% and adjusted earnings per share lifted 2%. Net debt came in down almost 14% at just over £86m. Trading has been robust and the directors pushed up the interim dividend by 20%, which I reckon signals confidence in the outlook.

Growth on the agenda

Chief executive Paul Fineman said in the report the firm has a “strong foundation” to meet its “ambitious” growth targets. He’s expecting organic progress driven by the “strong” sales pipeline and also expects growth via acquisition activity.  

I reckon IG Design serves a profitable niche in the market and has built up some long-standing relationships with many retail chains. We can see the success of the strategy in the firm’s trading record. However, as with many established growth opportunities, the firm’s success has not gone unnoticed by the investment community.

With the share price close to 639p, the forward-looking earnings multiple for the trading year to March 2021 is just over 18, and the anticipated dividend yield is a little under 1.9%. That’s not a bargain valuation, but I reckon the growth story could have much further to run.

Festive getaway

People aren’t just driving home for Christmas they are also flying and FTSE 100-listed International Consolidated Airlines Group (LSE: IAG) should reap the benefit. IAG owns British Airways, Iberia, Aer Lingus and budget airlines Level and Vueling, and will benefit from people jetting home to be with family at Christmas (or flying away from them).

The £12.2bn company has had a bumpy year, with the share price around 3% lower than 12 months ago as it has been caught up in Brexit turbulence, as well as crew and air traffic control disputes. The UK competition authority has launched an investigation into the 10-year revenue-sharing joint venture agreement with Finnair and American Airlines, which hasn’t helped. 

High flyer

Chief executive Willie Walsh recently reported a positive third-quarter performance with a small increase in operating profits before exceptional items from €1.45bn to €1.46bn year-on-year, “despite significant fuel cost and foreign exchange headwinds”. With oil falling to around $60 a barrel, fuel costs are now turning into tailwinds.

IAG is currently valued at just 5.9 times forecast earnings and looks cheap enough to buy, with Walsh setting out plans to increase target underlying operating profits to €7.2bn a year for 2018-22, up from €6.5bn. Plus you get a decent forecast yield of 3.9%, and cover of 4.3. The biggest danger is that a UK and European slowdown could hit traffic.

All wrapped up

This is the most wonderful time of year for greetings card and gift wrapping company IG Design Group (LSE: IGR). This AIM-listed £450m company has a large global reach, with operations in the Americas, Europe and Australia. Its products now retail in more than 200,000 stores across 80 countries and it is expanding through acquisition.

It has also been one of the most exciting stocks of the last five years, up an incredible 850% over that time, yet hasn’t attracted the investor excitement you might expect given its soaraway growth. I wrote about this small-cap 12-bagger earlier this year, noting that it has even managed to defy the retail slowdown affecting bricks and mortar retailers on the stricken UK high street. 

Christmas on the cards

The group recently announced a reported 23% rise in revenue to £205m, driven by organic growth of 4% and the acquisition of Impact Innovations Inc in the US, while underlying profit before tax jumped an impressive 76% to £18.5m.

Unsurprisingly it isn’t cheap, currently trading at 21.6 times forward earnings, but it isn’t that expensive given such strong growth, with earnings forecast to rise 13% and 17% over the next two years. You even get a small yield, currently a forecast 1.5%, with cover of 1.3x, but this stock is all about the growth. I’m hoping IAG and IG will both shine at Christmas, and for years to come.

Today, I’m looking at two stocks which have delivered healthy gains for investors over the last five years. The first is small-cap giftware and stationery manufacturer IG Design Group (LSE: IGR).

I’ve long been a fan of this £330m AIM-listed company, which sells products such as wrapping paper and party decorations. IG Design’s share price has risen by almost 950% over the last five years, helped by a 350% increase in profit over the same period.

The company’s growth has been driven by a mix of organic expansion and acquisitions. Today, IG announced one of its largest acquisitions to date, a £56.5m deal to acquire Impact Innovations, a leading supplier of gift packaging and seasonal decorations in the USA.

To help fund this transaction, IG plans to raise up to £50m in a placing of new shares at 510p. Despite the new shares selling at a modest discount to today’s opening price of 534p, the share price was up by about 4% at the time of writing. This strong performance suggests to me that investors support this deal and are confident of further growth.

Is the stock a gift at this price?

Paul Fineman, Design Group’s chief executive, expects to achieve $5m in annual cost savings over the next three years. Fineman says that the acquisition of Impact Innovations should add to earnings per share in each of the next three years, and expand the group’s customer base of major US retailers.

Today’s gains leave IG Design shares looking fully priced, on 21.8 times forecast earnings for 2018/19. However, this firm’s track record of growth suggests to me that the business could grow into this valuation fairly quickly. For long-term investors, I’d continue to rate these shares as a buy.

A market-beating retailer

One place where you might find IG Design Group products for sale is your local branch of B&M European Value Retail (LSE: BME).

B&M’s blue and orange storefronts have become a regular site in town centres and retail parks, as this discount retailer has expanded rapidly across the UK. Shares in the firm — which sells popular ranges of groceries and household goods — have risen by 44% since its flotation in 2014.

Annual profit has risen from £38.6m to £185.6m over the same period. One reason for this is that the group enjoys an operating margin of about 8% — more than double any of the listed supermarket chains.

There could be more to come

B&M plans to open another 50 stores in the UK this year, taking its total to around 600. Like-for-like sales rose by 4.7% last year, and the group’s pre-tax profit rose 25% to £229m.

This level of sales growth is well ahead of the big supermarkets. It suggests to me that the group’s value-focused business model fits well with modern shopping habits and could be taking market share from traditional retailers.

Trading on 19 times forecast earnings for the current year, this stock isn’t obviously cheap. But earnings per share are expected to rise by about 18% this year, and by a similar amount next year.

If this growth can be maintained, I think the current share price could still leave room for further gains. In my view, B&M could be a future FTSE 100 stock.

Design for life

Over the same period, Sirius Minerals is up a meagre 28%. Yet which generates all the clicks and column inches? Our polyhalite pals Sirius. In the meantime, IG Design Group has got on with making early investors brilliantly rich. Good on ’em.

Good on my colleague Roland Head too, the first Fool writer to highlight this opportunity back in 2015, when it traded under the name International Greetings. He said this “boring-sounding firm makes boring products like wrapping paper, gift tags and stationery but it hasn’t been dull for shareholders”, adding that I wouldn’t bet against further gains over the next year or two. How right he was.

Meet and greet

IG Design Group still does the same old boring stuff, and a jolly good thing too. Earlier this month, it posted record annual profits and revenues with strong performance across the US, Europe and Australia. Even the stricken UK returned to growth, with management bucking the national mood by seeing growth opportunities in bricks and mortar retailers, as well as online.

Pre-tax profit increased 51% to £19.7m, while the total dividend jumped 33% to 6p per share. It currently yields 1.5% and with cover of 3.5, management has scope for further double-digit progression. IG Design may look a little expensive at 19.4 times earnings but rapid growth justifies that valuation. City earnings forecasts remain positive, predicting 21% growth in the year to 31 March 2019, then another 9% to 2020. Past performance is no guarantee, but if you have not met this £311m stock AIM-listed stock before – greetings!

Mineral wealth

Sirius Minerals meanwhile needs no introduction but it does need explanation. The share price continues to progress in fits and starts, its performance chart marked by sudden spikes upwards, followed by equally dramatic sudden spikes in the opposite direction.

My best advice is do not invest at the top as you will get buried by the rush of profit-takers. Aim to buy when it is in the doldrums, and news flow is thin. Today it trades at 33p although some claim its share price could hit 60p this year. It might be an opportunity.

The long-term story remains strong for the £1.56bn FTSE 250 stock, and that is what you must focus on. It continues to sign new contracts for its planned fertiliser production, securing binding agreements for 4.7m tonnes a year, lifting it tantalisingly close to the 6m or 7m its needs to secure second stage financing.

Do not underestimate the risks. Chairman Russell Scrimshaw is looking for taxpayers to guarantee £1.44bn of debt, something he says is “essential” for the mine to succeed.

The City is forecasting a £23.55m loss this year, down from £79.25m in 2017, with no profits expected until at least 2022. Any delay, or government reluctance to help, could knock the stock. Remember, buy when it’s down, not up.

Since April 2013, shares in the company have produced a total return of more than 800% excluding dividends. Including dividends, over the past five years, the stock has returned 60.4% per annum for investors. 

Over the past 10 years, IG has added 26% per annum, enough to turn an initial investment of £1,000 into £11,500 or £100,000 into £1.2m. I believe that this performance is set to continue as the company builds on its past successes. 

Indeed, City analysts have forecast earnings per share growth of 38% for 2018, followed by an increase of 9% for 2019. According to a trading update published by the company today, it looks as if IG is well on track to hit these targets. 

Management notes current figures indicate trading for the fiscal year to 31 March will be in line with expectations thanks to a robust performance from all regions. What is even more impressive is the fact that the company expects to achieve this growth despite “record levels of capital expenditure invested” during the year. Capital spending, coupled with the acquisition of Biscay Greetings in Australia, should help the group continue to expand its global sales volumes across the world. 

The update also states “net cash ended the year positive” after property sales, organic cash generation and capital spending. Even though the company expects to end the year with a clean balance sheet, average leverage during the year is projected to have been below 1.5 times earnings before interest tax depreciation and amortisation (down from 2.3 times last year). 

So overall, IG’s business continues to grow rapidly, and management is complementing organic growth with acquisitions, funded by cash generated from operations. To me, this indicates that the company still has plenty of potential. With this being the case, the stock’s valuation of 21.5 times forward earnings does not look to be too demanding. 

Just getting started 

Another growth stock I like the look of is the Gym Group (LSE: GYM). This company is a trailblazer in the low-cost, pay-as-you-gym exercise market, which has been expanding rapidly over the past decade as consumers shift away from the tired contract-based gym business model. 

Gyms require a lot of capital to start up, but then go on to generate steady returns for many years without needing any more significant spending. As a result, the Gym Group started life with losses and high costs but as its portfolio has grown, economies of scale have begun to work in its favour. 

For example, as revenue has tripled over the past five years, the firm’s operating profit margin has increased to 11% from -0.5%. 

Analysts expect this trend to continue. Earnings growth of 41% is slated for 2018, and an increase of 29% has been pencilled in for 2019. The 2019 target implies the shares are trading at a forward P/E of 20, which might seem expensive. But when you consider the fact that the group only has 128 gyms (year-end 2017) and just over 600,000 members, compared to the total UK fitness industry membership of 10m across 6,800 gyms, it quickly becomes apparent just how small the company still is and how much room it has left to grow. 

Considering the above, in my opinion, the stock deserves a high earnings multiple.

However, there’s one company that has managed to shrug off these concerns and attract a high valuation thanks to its impressive growth.

Customer focus 

Smart Metering Systems (LSE: SMS) connects, owns and operates metering systems for gas/electricity suppliers. Over the past six years, as the demand for smart meters has grown, revenue has exploded by more than 300% and reported net profit has increased by 590%. 

It looks as if these impressive rates of growth carried on throughout 2017. According to the company’s year-end trading update, published this morning, total annualised recurring revenue for the period to 31 December grew 38%, and the overall number of assets under management by the firm increased by approximately 62% to 2.03m. For the gas division, meter recurring revenue grew by 15%, while recurring data revenue increased by a similar amount. Electricity meter recurring revenue nearly tripled during the period, and data revenue for this division rose 56% for the year to 31 December. 

Following this robust performance, management is expecting the company to report full-year earnings in line with current City expectations. Analysts have pencilled in Earnings per share growth of 10% for 2017 to 19.2p followed by an increase of 17.6% for 2018 to 22.6p. 

Unfortunately, the one downside of SMS’s explosive growth is that the shares have attracted a relatively high valuation of 38.2 times forward earnings. Still, while this is high, I believe that it is a suitable multiple for a business that is growing recurring revenue at a rate of more than 30% per annum and assets under management at a rate of more than 60%. As SMS continues to grow, I believe that it won’t be long before this valuation is out of date.

Dividend champion

Another grand champion I’m positive on the outlook for is IG Design (LSE: IGR). Over the past three years, shares in IG have surged by more than 400% as the company has grown net profit at a staggering 122% per annum on average. City analysts don’t expect this trend to end any time soon with growth of more than 50% pencilled in for fiscal 2018 followed by net profit growth of 14% for 2019. Earnings per share are expected to expand by a total of 55% during this period. 

Formerly known as International Greetings, IG is a designer, manufacturer and distributor of items such as gift packaging and greetings cards. This is a relatively low-margin business, but the firm’s increasing scale is allowing it to achieve returns not available to smaller peers. For example, over the past five years, return on capital employed — a measure of how much profit a company is generating for every £1 invested — has increased from 7.6% to 15.5%. Improving economics have driven free cashflow growth, and thanks to its improving financial position, IG has been able to grow its dividend from 1p per share and 2015 to an estimated 5.5p for fiscal 2018. 

Despite this impressive profit and dividend growth, shares in IG look relatively cheap compared to those of SMS. The stock trades at a forward P/E of 17.9 and yields 1.5%.