Toward the end of last week, I wrote about the things I look for when selecting the best growth stocks. As luck would have it, two companies that satisfy many of these points reported to the market today.
XP Power
Critical power control components supplier XP Power (LSE: XPP) released its latest trading statement this morning. Due primarily to ongoing demand in the Semiconductor Manufacturing Equipment sector, orders rose to £97.2m in the three months to the end of September. That’s growth of 73% on the same quarter in 2020 (or 87% once foreign exchange fluctuations are taken into account).
All this brings year-to-date revenue of £181.4m, up 4% on the previous year. Based on this, XPP said its expectations on full-year performance remained in line with those of the market.
Considering potential headwinds, I’m not surprised we didn’t see an increase in guidance. A possible resurgence in Covid-19 infection levels could interrupt trading momentum, as could global supply chain disruption and rising costs.
All this needs to be borne in mind, considering the valuation. A forecast P/E of 26 times earnings before markets opened isn’t excessive but it’s certainly not cheap.
Nonetheless, XPP continues to be a classy business, in my eyes. Customers in this space rarely change suppliers once on board, providing a good degree of earnings visibility. This, combined with consistently solid returns on capital, great free cash flow and limited debt (£25.2m), makes me wonder whether it’s time to begin re-building a position in the Singapore-based business.
At the very least, XP Power will remain on my watchlist.
Treatt
Ingredients manufacturer Treatt (LSE: TET) also reported on trading this morning. Like XP Power, the mid-cap company occupies a great position in a niche market.
Full-year revenue of roughly £124m is now expected. This is largely thanks to a solid performance in its ‘healthier living’ categories (such as tea) and supported by the reopening of the on-trade market. That would represent growth of around 14% on that achieved last year. Treatt also expects FY21 profit, before tax and one-off costs, to hit management expectations.
Perhaps most importantly for investors, the AIM-listed firm said global supply chain headwinds had “not materially impacted” trading. Again, there’s no guarantee this won’t change in the future. However, the fact that the company has maintained levels of inventory in anticipation of problems should provide some comfort for holders.
Treatt is also financially sound. Net debt stood at just £6m by the end of the financial year. That’s despite the company shelling out for a new UK facility that should triple UK production capacity once built. Throw in a bursting order book and the possibility of further growth in China and the US and everything looks very promising indeed.
However, my issue with Treatt is the price of its stock. I don’t mind paying up for quality. However, a (pre-market open) P/E of 37 is beyond what I’m prepared to shell out. Such a price tag demands perfect execution from a business.
Regardless of whether this happens, a wobble in the general market could see investors quickly jettison any highly-valued growth stock. This being the case, I’d much rather load up when everyone is losing their heads.
Treatt remains a superb company, in my opinion. It’s just not one I’d buy right now.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Treatt and XP Power. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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