One concern a number of market participants presently have is that much of the rally in share prices over the past year would appear to be a result of an expansion of price-to-earnings (PE) multiples rather than because of growth in earnings per share (EPS). This has led a number of commentators to suggest that investors need to be careful and not get carried away — if earnings growth does not eventuate, then many stocks may appear very expensive and have serious downside risk.
With that in mind, identifying stocks that have a high likelihood of meeting consensus forecasts and that should post strong earnings growth to justify their current multiples is as important as ever. Here are four stocks that, according to Morningstar's research, are forecast to grow their EPS by over 15% this current financial year.
1. CSR (ASX: CSR) is a well-known building supplies company that reported earnings of 6.6 cents per share (cps) at its most recent full-year results. CSR is forecast to earn 11.8 cps in FY 2014, which implies a 78.8% increase.
2. IRESS (ASX: IRE) provides critical software to the financial services sector in Australia as well as a host of other countries. IRESS is forecast to grow EPS from 29.6 cps to 34.2 cps, implying growth in EPS of 15.5%.
3. REA Group (ASX: REA) is better known by its flagship website realestate.com.au. The company continues to expand both in Australia and abroad and is forecast to grow EPS from 83.3 cps to 105 cps. If it meets this forecast it will have grown EPS over the year by 26%.
4. Goodman Fielder (ASX: GFF) owns many of Australia's best known food brands including Meadow Lea and White Wings. The firm has had a difficult few years, however the future is looking brighter with expectations that EPS will increase this year from 3.7 cps to 5.2 cps, implying a growth rate of 40.5%.
While Goodman Fielder and CSR are coming off of a depressed earnings base, REA and IRESS continue to produce solid results year after year. The problem for investors is being alert to the opportunities to purchase companies such as these when the price on offer compared to the value is in their favour.