Thin volumeswill likelycharacterise the next few weeks of trade so, from my perspective, you shouldnt trade shares ofTesco (LSE: TSCO) andAmurMinerals (LSE: AMC)if you really want to enjoy your summer break!
Thats not to say that they may not offer any long-term value, but if I were to addequity risk to my portfolio Id rather chooseDCC(LSE: DCC) aDublin-based support services firm whose stock promises a decent mix of capital appreciation and yield.
The Rise Of DCC
If you are chasing sustainable growth and likely earnings upgrades, youd do well to consider DCC instead of Tesco and Amur.
DCCs corporate strategy is flawless, boosted by organic and inorganic growth that supports an attractive valuation. Here are some of the main features of this solid business:
- Steady margins and cash flows;
- Limited capital investment requirements;
- Solid balance sheet metrics;
- Rising earnings and dividends.
Its first-quarter results ended 30 June, which were released last week, confirmed that most of its divisions are likely to record an impressive performance this year.
If DCC surprises analysts with higher operating cost savings and a steeper rise in revenues, or both, its shares could continue their formidable run, while their forward valuation, based on net earnings (P/E) multiples, could drop below 20x from current estimates at 23x P/E.
Thatsa distinct possibility if its latest acquisition of Butagaz delivers synergies, as it seems likely. Its track record is impressive:DCCs stock price has risen 46% since the turn of the year and has doubled in value over the last two years.
Finally, it is forecast to deliver a forward yield of 2%.
Amur: Its Time To Deliver
Amurs rise and fall has been entertaining to watch (particularly if you were not invested in its stock in recent times!) on the one hand, Amur isa highly speculative trade that should be on your radar because it has alreadyregistered the licence for its benchmark Kun-Manie project. On the other, at22p a share which is 100% higher than the level it recorded in mid-May it must prove that its ambitious plans are not out of whack with reality.
When it reported its 2014 results at the end of June, Amur said that thetotal initial capital expenditure of its flagship project is projected to be $1.38bn, to be expended in a two-year construction period.It added that sustaining capital is estimated to be $474m over 15 years.
Thats a total of $1.85bn an amount thatwould scare off even the bravest investor.My advice now is keep an eye on its financing plans.
Tesco:Cheaper Than It Looks?
Tesco remains a solid restructuring play, in my opinion, although short-term volatility in its stock price shall be expected.
True, its trading multiples are not particularly attractive: at 220p, Tesco shares change hands at 25x forward net earnings.Still, I do not think thatrelative valuations are fully reliable ata time when the entire sectors profits are under strain.
Moreover, if Tesco manages to grow its underlying income at between 5% and 10% annually over the next three years, its net earnings multiples for 2017 and 2018 will fall below 20x and 15x, respectively a valuation that would render its stock much more attractive.
Cost-cutting measures could do the trick, and the market expects a much higher growth rate, anyway.Given that huge write-downs have already occurred, my opinion is that a 10%/20% upside from its current level is very likely based on the book value of its total assets.
Of course, youcould argue that there are better options than Tesco,including stocksthat pay higher dividends — and that’s right, but youshould notchase the very highest yielder of the day!
Remember that thehighest yielders are often priced that way because the payout is likely to be cut, as our research points out.That said, income from dividends is very important to achieve double-digit all-in returns, so our Motley Fool analysts have identified a few value stocksthat are set to deliver a great balance of growth and yield over time.
Do your homework,but do it now because our FREE research is available only for a limited amount of time!
Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.