Pricing stocks according to their earnings growth potential is never an exact science. Unless they are relatively unknown stocks, paying a premium for fast growers sometimes is unavoidable. Still, paying a reasonable price for that growth is fine as long as you can feel secure in the projected growth.
If a company is growing earnings, let's say by 25%, then paying around 25 – 30 times earnings isn't out of the question. At that pace, it can potentially double its earnings in less than three years. Its stock could closely follow that uptrend as well. Here are two companies with strong growth profiles that I think could power their share prices up further over the next five years.
1) G8 Education Ltd (ASX: GEM)
The childcare and education centre operator has been in an acquisition phase, amassing 379 centres in Australia and Singapore. The childcare industry is highly fragmented and most centres are operated by single, private owners, so the company could continue its expansion for a number of years. Childcare is in high demand among families and government subsidies also help make the business profitable.
The stock offers a 3.0% dividend yield fully franked and is priced at 27 times earnings. Over the past year, earnings per share were up about 26%, which matches well with its PE. Analyst consensus forecasts are for earnings to keep rising strongly over the next two years, spurred on by more childcare centre acquisitions. In its recent half year report, its interim net profit rose from $11 million to $16.3 million. It is like an expanding restaurant chain, while still in the growth phase, earnings increases can be remarkable.
2) Oil Search Limited (ASX: OSH)
The energy producer is projecting a four-fold increase in its production output by 2015 thanks to its PNG LNG project, which started to ship LNG exports in May and should reach full production capacity in two years. In FY 2013, earnings rose dramatically and its half year results saw net profit up 34%.
The stock has a 28 PE and offers a 0.6% yield unfranked. The yield may be small, but the dividend is forecast to rise along with projected earnings increases over the next two years. The company stated there is potential for two more LNG trains beyond 2015, which could ramp-up production once again, so current share prices may seem cheap 5-6 years from now.
