3 undervalued growth companies for your portfolio

Combined with financial discipline and thoughtful strategy, there’s nothing quite like focused management and staff enthusiasm to ignite the prospects of a business. In this Fool’s view, these three companies fit the bill.

Sundance Energy (ASX: SEA)

Although ASX-listed, Sundance Energy is a US onshore oil and gas producer with assets located in prime locations from Texas to Mississippi. Corporate headquarters are in Denver, Colorado. Costs of production are relatively low, and access to necessary infrastructure is not a problem.

Sundance Energy is well set up financially with no net debt, established growing cash flow and funds in the bank. In addition to producing wells, exploration success has been outstanding and further proven reserves are expected to increase substantially.

At $1.04, Sundance Energy is selling around 5 times 2014 earnings – and, with the speed at which wells are brought into production; this could prove conservative. There is unlikely to be a dividend in the short term as the company is very intent on increasing production and substantiating further reserves. SEA is an ignored stock with plenty of near term upside.

Servcorp (ASX: SRV)

Servcorp is the world’s second largest serviced office provider and operates 130 floors in Australia, New Zealand, USA, Asia, the Middle East and Europe. In addition, a range of ‘virtual’ offices is successfully marketed as ‘everything but the physical office’. Operating in a high growth and diverse industry, Servcorp’s main differentiation is the high quality of service, location and IT facilities.

Servcorp is financially strong – no debt, good cash flow and $87 million in the bank. The share price has been restrained as a result of the heavy capital expenditure required in developing a significant presence in the US. Much like hotels, serviced offices need a couple of years to mature after initial opening. In an encouraging sign, the US business is reported to be cash positive at this stage.

On face value, results for 2013 won’t be sensational at a PE of 17 and 4.3% yield. However, 2014 on will show substantial profit and yield improvement as more and more floors mature. Added to this are benefits from a lower Aussie dollar. Taking a two-year view Servcorp is undervalued.

Oroton Group (ASX: ORL)

With 75 years in business it’s difficult to describe this company as a promising growth prospect. However Oroton had a history of periodic adaption and fashion innovation. In the past few years Sally MacDonald (CEO) and Ana Maria Escobar (creative director) have woken up this business, with Oroton now operating 71 stores/outlets including seven in Asia (Malaysia and Singapore). Additional stores in Dubai, Hong Kong and Shanghai are set to open by Christmas. Oroton’s online sales exceed 10% of revenues, exceptional for an Australian-based retailer.

The expiration (after 23 years) of the Ralph Lauren licence has affected the immediate outlook – the Ralph Lauren segment contributed 50% of revenues and 30% of profits in 2012. In an update on 2 August 2013, Oroton announced 2013 earnings are likely to be modestly improved at 62c per share (Ralph Lauren licence expired 30 June 2013); 2014 earnings may range between a very pessimistic (nothing going right) 25c – 40c+. At $6.85, Oroton trades at 17 projected 2014 net earnings (assuming earnings of 40c).

However, the update doesn’t take into account the impact of any new acquisitions and license agreements. Talks are well advanced and confirmation of at least one deal is expected over the next three to six months. With astute and patient management Oroton won’t rush into deals for the sake of impatient investors.

Fashion and retail remains a buyer’s market, and there is strong potential for at least one value-creating deal. In an important signal, Oroton is retaining staff and overhead previously used in the management of the Ralph Lauren license – meaning implementation of any agreement will be fast-tracked.

On the financial side, Oroton is in an excellent position — no debt, good cashflow, negligible intangible assets, high return on equity and strong operating margins. With a stash of cash and a patient hand, the longer term prospects for this company are convincing. I believe Oroton is undervalued on a medium and long term view.

Foolish takeaway

These three companies march to different drums and different timescales; however, all have solid prospects – not adequately reflected in current market pricing. Sundance Energy (a forgotten stock) is fast-tracking additional proven reserves and already has a rich portfolio of undervalued producing assets. Servcorp will unlock the value from intense capital investment in the US over the next two years. Oroton is a longer term prospect with the financial capacity and business savvy to leverage returns from any agreed acquisition or license deals.

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Motley Fool contributor Peter Andersen owns shares in Oroton, Servcorp and Sundance Energy.

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