LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:
growth in earnings
an upward P/E rerating
Highly successful fund manager Peter Lynch classified steady growers as "stalwarts", which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if that steady earnings growth can continue, and whether the shares are cheap.
Seeking steady growth
Not all companies achieve steady earnings growth as you can see by the aggregate performance of those in London's premier FTSE 100 index, where the compound annual growth rate over the last five years has been just 0.7%:
Year to June
FTSE 100 index
Aggregate earnings per share
Steady earnings growth is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.
One contender is Amec (ISE: AMEC.L) , an international project management, consultancy and engineering services company working for the public and private sectors. It serves industries like transport, power, oil and gas. This table summarizes the company's recent financial record:
Year to June
Revenue (million pounds)
Adjusted earnings per share (pence)
So, an equivalent 18.1% compound annual growth rate in earnings puts Amec in the stalwart category.
The company delivers engineering, project management and consultancy to its public and private sector customers in the oil and gas, minerals and metals, clean energy, environment and infrastructure markets. Its services range from front-end consultancy at the start of a project though to decommissioning at the end of an asset's life. Among its clients it counts big names like BP, Shell, EDF, National Grid and the U.S. Navy.
The company employs some 27,000 people from offices in around 40 countries worldwide. Right now, it derives around 30% of revenue from the U.K., 28% from Canada, 26% from the U.S. and 16% from the rest of the world. Further growth is firmly on the agenda both organically and through acquisition. The firm expects double-digit revenue growth during 2012 and further progress beyond.
Amec's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:
1.Growth: revenue, profits and cash flow all trending up. 5/5
2.Level of debt: net cash on the balance sheet. 5/5
3.Outlook and current trading: both recent trading and the outlook are good. 5/5
4.Enterprise value to free cash flow: at around 20 and above historic growth rates. 2/5
3.Price to earnings: at around 16 and below historic earnings growth rate. 3/5
Overall, I score Amec 20 out of 25, which encourages me to believe this stalwart can continue earnings growth that outpaces that of the wider FTSE 100. The shares appear fairly priced when compared to the FTSE's price-to-earnings ratio of around 10 and the firm's predicted growth.
Amec's absence of borrowings, positive outlook and strong trading record make continuing earnings growth look likely. If net cash flow can keep up with that growth, the firm's rosy prospects seem reasonably priced.
Right now, forecast earnings growth is 19% for 2013, and with the shares at 1,139 pence, the forward P/E ratio is 12. Considering Amec's 3% dividend yield, and the other factors analyzed in this article, I think that looks attractive.
Amec is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.
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Further investment opportunities
The article Is FTSE 100 Stalwart Amec Good Value? originally appeared on Fool.com.
Kevin does not own any shares mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of National Grid. The Motley Fool has adisclosure policy.
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