Investor sentiment and market hype can drive share price higher for short periods but over time it is earnings that make the difference. Of this year’s Top Ten performers, seven have double-digit earnings growth forecasts over the next two years. Here is a table with the earnings growth forecasts along with some valuation ratios.
P/E (Sector P/E)
2 Year Earning Growth Forecast
Qantas Airways (QAN)
Northern Star Resources (NST)
Evolution Mining (EVN)
Sirtex Medical (SRX)
Domino’s Pizza (DMP)
TPG Telecom (TPM)
Corporate Travel Management (CTD)
Looking strictly at the numbers, it appears there is truly something for everyone here. For value investors three stocks have low or reasonable Price to Earnings Ratios with very impressive Price to Earnings Growth Ratios, backed by high growth forecasts. Qantas Airways (QAN) looks like the cheapest of the group, with a P/E well below the Sector average. Northern Star Resources has a very low Forward P/E with an ultra-low P/EG and a mammoth earnings growth forecast. Evolution mining is not far behind.
Then you have the growth stocks, with bloated Price to Earnings Ratios (in the eyes of the value crowd) but solid growth. Domino’s P/E is about 3.5 times higher than its Sector P/E and the Future P/E is not much better, but it still is projected to grow. The share price has been going up for years, rewarding investors along the way, with impressive average annual rates of total shareholder return – 70% over three years; 54.6% over five years; and 34.6% over ten years. Sirtex Medical (SRX) and Corporate Travel Management (CTD) have lofty price to earnings ratios but when you factor in growth, the price to earnings growth ratios for both are less than 1.
While all of these stocks appear to be worthy of consideration, the riskiest have to be the two gold miners. In addition to its mind-boggling 119.2% earnings growth forecast, Northern Star has a current fully franked dividend yield of 2.2%, with a two year growth forecast of 66.1%. Evolution Mining does not yet pay a dividend but has impressive growth potential, but with the price of gold shaky at best and breaching the US$1,000 per ounce level at worst, both these stocks could see lowered forecasts in the near future.
Qantas shareholders are reaping the rewards of the company’s successful turnaround program. Impressive numbers suggests bright days ahead for the airline. The internal cost cutting got a big and unexpected boost when the price of oil fell through the floor. Fuel costs are one of the factors beyond the direct control of an airline, making these stocks too risky for many investors. In addition, despite its recent success, Qantas faces stiff competition from a host of Asian and Middle-Eastern airlines with much lower labour costs. On 10 June Qantas announced an extension of its agreement with US-based American Airlines, with Qantas flying to San Francisco and AA flying from Los Angeles to Sydney. This is a revenue-sharing arrangement.
Historically many big-name investors, including Warren Buffet, have advised retail investors to avoid airline stocks. However, the International Air Transport Association’s (IATA) recently raised its forecast for airline profits across the world by 17%. The current forecast stands at US$29.3 billion, which if achieved would almost double the prior year profit.
Investors in Sirtex Medical (SRX) were buoyed by the February release of Half Year Results showing a 57% revenue increase and a 38% rise in profit. One month later the stock plunged on the news of a less than expected result from an international study, called the SIRFLOX study. The study evaluated a Sirtex treatment option for colorectal cancer that had spread to the liver. The Sirtex treatment is currently used as a last resort. The expectation was that a successful evaluation could move the Sirtex treatment to a first option. The share price plunged. Here is the chart.
What investors missed was the two-pronged nature of the study. While the SIRFLOX study did not show a statistically significant improvement in overall Progression-Free Survival; the second endpoint of the study was positive. The treatment did show a statistically significant improvement in Progression-Free Survival in the liver. Progression-Free Survival basically measures the spread of the disease over time. The study showed patients with liver cancer extended the period of time before the disease worsened by six to nine months.
Results were later presented to the American Society for Clinical Oncology (ASCO) and Sirtex believes its treatment will become a first-line option in conjunction with chemotherapy. If that happens, some experts claim the company’s growth rate could triple.
There is nothing trendy or exciting about pizza. However, Domino’s has made use of technology with online ordering and an application for ordering from smart-phones. The company is expanding its presence on social media and is planning further expansion in its Japanese market.
Domino’s reportedly gets about 50% of its revenue through digital channels, with most of that coming from mobile devices. The company is getting ready to enable ordering via Apple’s iWatch. Domino’s has a current dividend yield of 1.1%, fully franked, that is expected to grow by about 31% over two years. Half year results showed record sales and a 41.2% increase in profit.
Domino’s began trading on the ASX on 11 May of 2005. The stock has risen 1400% in the last ten years. Here is the chart.
TPG Telecom (TPM) has seen its share price rising since the company took majority ownership of network provider PIPE Networks back in 2009. Here is a five year chart for TPM.
On 27 July shareholders of iiNet Limited (IIN) approved a takeover offer from TPG, besting rival M2 Group (MTU). The move vaults TPG into second place as the nation’s second largest broadband provider with 1.7 million subscribers. A move of that scope is sure to lead to earnings forecast upgrades to reflect the more muscular TPM. The company’s Half Year 2015 results were solid, with a 59% rise in revenue and an 18% jump in profit.
The final stock is Corporate Travel Management (CTD). The company’s name aptly describes what it does – provide a full range of travel services for businesses, ranging from best air fare guarantees to travel insurance to ground transportation to accommodations to managing travel for corporate events and even procuring travel visas. It operates globally in more than 150 countries. CTD also has a division that arranges personal leisure travel for its corporate customers.
Despite challenging business conditions around the world the company reported spectacular Half Year 2015 results. Revenues increased 93% while profit rose 76%. In addition, CTD raised its profit guidance for the full year. On 6 May Company management raised its profit guidance again following a joint venture agreement with a Chinese e-commerce travel company.
The company went public on 13 December 2010, with an issue price of $1.00 per share. The opening price on its first trading day was $1.45, closing down at $1.20. That was the lowest price in CTD’s trading history.
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