AGL Energy Ltd and Collection House Limited: 2 stocks to watch

These two companies look to have bright futures.

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Growth in business can come from acquisitions or by doing what you already do better. Either way, they both require investment of time, money and effort, and the results are usually not immediate. That’s why we stress having a mind set for long-term investment for individuals to plan for the future.

These two companies have good opportunities to grow what they do best.

AGL Energy Ltd (ASX: AGK) has been chosen by the NSW government to enter into an agreement with the state government for the acquisition of Macquarie Generation for $1.505 billion.

The integrated energy company had been in competition with ERM Power Ltd (ASX: EPW) for the power assets which include two coal-fired power stations, Liddell and Bayswater, located in the Hunter Valley.

These two stations supply around 26% of the state’s power needs, and when the sale was first announced in July 2013, they had been valued in the Macquarie accounts at $2.1 billion, after a $1 billion write-down related to the carbon tax.

AGL Energy doesn’t have any significant power assets in NSW, so it believes that the ACCC, which will make a ruling on the competitiveness of the proposed acquisition, will not see it as a major concern for adversely affecting market competition.

Electricity retailers Origin Energy Limited (ASX: ORG) and Energy Australia are two large operators in the state, and currently have substantial power generation assets there.

State assets like these commonly don’t come up for sale, so this is a great opportunity for the company, yet the funding proposal for the acquisition entails a $1.2 billion renounceable rights issue and $350 million in bank debt. The ACCC’s approval of the acquisition will be decided in mid-April, so the rights issue will be postponed until formal approval has been received.

The company recently acquired Australian Power and Gas in October 2013 with 300,000 customers.

Collection House Limited (ASX: CLH) announced its 2014 half-year results with a very pleasing 16.2% increase in NPAT to $9.4 million, compared to 2013 first-half NPAT of $8.1 million.

Revenue rose from $47.3 million to $52 million, up 9.9%. The receivables management provider was able to increase its collection services revenue by 14.4% and revenue from its purchased debt ledger segment was up by 6.5%, compared to the prior corresponding period.

Its growth strategy has paid a return in performance from the growth initiatives in staff and systems, and its financial strength has improved with 2014 first-half net gearing reduced to 37.2% from 45.5% in the first half of 2013.

Purchased debt ledger (PDL) investment rose to $38.4 million for the first half, and full-year investment is expected to be $75 million – $90 million. Higher earnings allow the company to put more funds into PDLs, which then flows on to higher potential revenues from the money it is able to collect. The company’s skill in buying the debt ledgers at an adequate discount keeps the rate of return on its investments up.

2014 full-year NPAT guidance was raised to $17.5 million – $18.5 million, up from $17 million – $18 million. NPAT in 2013 was $15.6 million, so that would project a rise of 12% – 15.3%.

Foolish takeaway

Steady, consistent growth is what all investors should be looking for. Earnings should be increasing, but we also want to see that a company’s investments are paying a good rate of return over time.

Investment in a company’s future may cost a lot at the beginning both in money and time, so knowing what the strategy is and how it performs along the way is essential to gauging its success.

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

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