As things stand, a company needs to boast a market capitalisation upwards of £5.5bn to make it into the FTSE 100. Challenging as this may be, I can think of two growth stocks that could be soon be making the leap in the next quarterly reshuffle.
Post-pandemic boom
Kitchen supplier Howdens Joinery (LSE: HWDN) looks a good bet for promotion, especially after today’s well-received update on trading.
Having benefited from the home improvement boom, Howdens announced that this momentum had continued into the second half of its financial year. UK revenue from 13 June to 30 October 2021 was just under 21% higher than in the same period last year. This brings year-to-date revenue growth to a stellar 37.7%.
Positively, this performance wasn’t confined to Howden’s home market either. International sales growth was also strong, up 16.6% over the three quarters and 39.2% year-to-date.
Based on this, Howdens now believes pre-tax profit for the full year will come in “around the top end of current analyst forecasts”. This would be somewhere in the region on £360m. That all sounds rather good to me. So, would I buy today?
Well, despite having climbed 43% in value over the last 12 months alone, HWDN shares still look pretty fairly valued. A forecast price-to-earnings multiple of 21 before markets opened for a high-quality market leader doesn’t seem excessive. After all, the company regularly posts excellent returns on capital.
Then again, recent momentum could slow, particularly if consumers begin tightening their purse strings. Indeed, Howdens already expects a “more normalised trading pattern and performance in 2022“. There’s also inflation to ponder, even if the company appears to have been successful in passing on higher costs to its customers so far.
Whether these headwinds are enough to delay Howden’s entry into the FTSE 100 is hard to say. As a Foolish investor focused on long-term returns, however, I must say that I continue to regard this company as a classy outfit. I’d have no issue taking a position in the stock today.
Primed for FTSE 100 promotion?
Another FTSE 250 growth stock that could potentially be moved to the FTSE 100 in the next reshuffle is industrial and electrical equipment distributor Electrocomponents (LSE: ECM).
Half-year numbers from the £5.3bn market cap company are due on Thursday. As things stand, I don’t expect much in the way of bad news for those already invested.
Last month, ECM stated that trading had been strong in all regions in which it operates. In fact, total like-for-like revenue growth over the six-month period has already been estimated at 31%. That’s despite the Covid-19 ‘pingdemic’ and cost pressures many businesses are wrestling with. This led the company to predict that full-year revenue growth and adjusted operating profit margin would now be “slightly ahead” of previous guidance.
Shares change hands for almost 26 times forecast earnings. That’s not exactly cheap considering the pretty average margins in this line of work (roughly 8%).
Like Howdens, ECM will face tricky comparatives going forward, too. Profit is also likely to be “more weighted to the first half”. To me, this suggests things are as good as they’re going to get for now.
Still, I can see why investors have been bidding the price up over the last 12 months. This presents as another well-run company with minimal debt. As such, it’s one I’d at least consider buying regardless of which index it features in.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery Group. 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.
This post was originally published on Motley Fool
