It's not easy shaking scepticism once it's entrenched as Australia's largest listed childcare centre operator is finding out today.
Shares in G8 Education Ltd (ASX: GEM) gave up early gains and are trading a cent above breakeven at $3.14 after rising as much as 5.8% following its half year results announcement.
Management reported a 73% increase in net profit to $28.2 million on the back of a 66% jump in revenue to $310.9 million for the six months to end June 2015, and was at pains to point out its strong organic growth profile.
One of the key concerns investors have about acquisition-hungry G8 Education is its organic growth rate with nearly half of the group's 457 centres being acquired in the past 18 months.
But management said that centres it bought in 2011 have generated earnings before interest and tax (EBIT) growth of 20.4% in the first half of 2015 and EBIT growth is averaging 19.3% over five years.
There's quite a big variation in the EBIT growth numbers of the acquisitions done in various years though and there's even quite a bit of volatility in the half-year-to-half-year growth data over the past several years.
For instance, centres bought pre-2011 produced EBIT growth of 12.1% in the latest half and have ranged as high as 28.2% in the first half of 2013, but fell to -1.4% in the first half of the following year.
However, the data does demonstrate that G8 Education's centres can, by and large, achieve double-digit growth rates and that should assuage some fear about the sustainability of its business.
On the other hand, there are still niggling doubts that it will have a harder time dispelling. For one, its eagerness to acquire its smaller rival Affinity Education Group Ltd (ASX: AFJ).
G8 Education sweetened its takeover offer to 80 cents from 70 cents a share, which Affinity shareholders can take in cash or scrip, and the offer is priced at about 7x Affinity's earnings before interest and tax (EBIT).
That is way above the 4x EBIT G8 Education would pay for a private centre operator and it perhaps indicates that the "low hanging fruits" in terms of cheap well-located centres are becoming few and far between.
Sure, the higher multiple may be justified because of cost savings G8 Education can extract from its listed-peer that are not available in the smaller scale private deals it has been pursuing before, but I doubt the potential synergies would translate to a 4x EBIT.
What's more, G8 Education's earnings per share growth is not keeping pace with revenue growth. The group posted a two-third increase in its topline but EPS is up 60% to 8.75 cents a share.
On a brighter note, G8 Education looks well placed to meet consensus EPS forecast for the year (assuming it achieves a similar earnings split between the first half and second half as it has in past years) and that means the stock is reasonably inexpensive as it is trading on a 2015 price-earnings multiple of 12x.
Given the details around the group's organic growth profile, I think there is a 20%-25% upside to the stock before it reaches fair value (without Affinity).
While the potential gain is nothing to sneeze at, it's not a high conviction call for me and I think there are better risk-adjusted growth stocks to look at.
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