Motley Fool Australia

Motley Fool Australia

Since 1993, millions of investors have trusted The Motley Fool for simple, down-to-earth investing research.

4 stocks with good earnings growth potential

Looking over some of the better known companies, I found four that are showing good earnings growth potential, based on what they have done in the past and what a consensus of analyst forecasts are projecting over the next two years.

Forecasts can be adjusted along the way, and are not set in stone, so a good forecast doesn’t absolve investors from doing their own homework. Looking at past long-term performance can give insight into how a company could possibly grow in the future.

Financial services provider IOOF Holdings Limited (ASX: IFL) had a 13.1% increase in NPAT in 2013, and analyst forecast consensus estimates a compound average EPS growth rate of 11.9% for the next two years. Currently its PE ratio is 19 and it has a dividend yield of 4.71%.

The stock is adequately priced, but shareholders have received an average annual total shareholder return of 11.6% over the past 10 years, so it’s a stable earner for the portfolio.

Leighton Holdings Limited (ASX: LEI), the civil engineering and infrastructure developer, had one of its highest half-year results for earnings per share in its June 2013 half-year report, $356 million. The half-year report the year before was only one third of that, but now the company has returned to levels more in line with previous years.

It has a dividend yield of 4.96% and its analyst forecast consensus estimates EPS growth to be a compound average annual 13.2%, over the next two years. Compared to its current 12.3 PE, the share price is not at a huge premium level and borders upon being adequately discounted compared to EPS growth potential.

Sky Network Television Ltd (ASX: SKT), the New Zealand multi-channel, pay TV and free-to-air service provider, had a 15.8% NPAT increase in 2013. NPAT was $111.4 million on $729.3 million in revenue. Its 10-year median annual EPS growth is 14.2% and the dividend yield is 3.58%.

Analyst forecast consensus is estimating a compound annual EPS growth rate of 21.4% over the next two years, so with a current PE of 18.45, the share price is not in a solid discount price range, but were it to become a PE of 16.5 or less, then that would be a more attractive multiple.

Holiday and flight bookings provider Flight Centre Travel Group Ltd (ASX: FLT) has been flying high in share price, up 57% over the past 12 months. Beefing up its shop front franchises, improving online sales and focusing its growth on corporate travel business to improve profit margins has all come together in building up the stock.

EPS growth in 2013 was 22.9%, much higher than its 17.2% 10-year median EPS growth rate. Analyst forecast consensus has the stock growing by a compound annual rate of 11.2% over the next two years, roughly in line with its 10-year CAGR of 12.32%.  The current dividend yield is 2.99% and PE is 18.7.

Although the Aussie dollar has been weakening to under $0.90 to the US$, recent statistics indicate that many Australians are still opting for an international holiday rather than domestic holiday because of the relative costs. In addition, the company’s US$ denominated revenue will help grow earnings when translated back into Aussie dollars for reporting. These two combined point to further revenue and earnings growth.

Foolish takeaway

Sometimes we get a clear discount on a stock because of lower market sentiment, or one or two uninspiring business reports. Other times, the stock is at a reasonable price for the growth potential it shows.

An investor’s goal is to find quality companies that are generating more money than they actually need to do business, so that they can fund future growth internally.  Secondly,  with your stock wishlist, estimate a price range that a stock would show fair value and discount territory.

Eventually, if the stock moves into that price territory, then you’ll be ready to start or add to your position.

Attention bank shareholders!

Fact: Australia's large banks had an incredible run in 2013. But some top analysts are saying the trend could stop dead! Get the inside scoop in The Motley Fool's brand-new FREE investment report, "What Every Bank Shareholder MUST Know."

The One ASX Pick You MUST Add to Your Portfolio

Top Motley Fool analysts just identified their #1 ASX pick for 2014, a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!).

Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool’s Top Stock for 2014."

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

See all posts by Darryl Daté-Shappard
The Motley Fool