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Many companies in the FTSE 250 The mid-cap index has growth potential. But I would focus on two for further investigation with a view to sustaining for five years or more. Although I don’t have extra money to invest at the moment.
The first is coats (LSE: COA), the industrial yarns company. This month’s full-year earnings report touted: “10% organic growth in revenue, 22% organic growth in adjusted operating profit and strong free cash flow.”
Enhanced future prospects
Chief Executive Rajiv Sharma said the company made “excellent” it will progress transforming its business during 2022. And the acquisitions of Texon and Rhenoflex in the period have strengthened the firm’s position in the attractive footwear market. Sharma believes the moves increased the medium-term organic growth and margin potential of the business.
And that’s the kind of catalyst I’m looking to find when choosing investments, something that can lead to bigger returns down the road. But beyond that, Coats has been working to improve the efficiency of his operations. And directors are also focused on reducing costs.
Sharma is excited about the future of the company. He said Coats is well positioned in its markets with a focus on growth brands. And there’s a pipeline of promising products to keep the pot boiling with growth. So Sharma is “enthusiastic” about the opportunities for expansion and profit margin of the company in the medium term.
However, it’s worth noting that stocks have made no overall progress for more than five years. And that could happen in the future if the company’s growth plans stall due to operational challenges.
However, city analysts expect earnings to grow around 5% this year and 20% in 2024. And with the share price nearing 77p, the prospective earnings multiple for next year is about nine. And I see that assessment as fair.
turning around
Meanwhile, the second stock on my list is Cussons PZ (LSE: PZC), the provider of fast-moving consumer goods. The company delivered a consistent set of half-year results in February, despite the current challenging overall economic environment.
Chief Executive Jonathan Myers said the company has more work to do with its transformation program. And there are some short-term headwinds to navigate in some of the company’s markets. But the directors are “sure” about the opportunities that lie ahead. And the ongoing plan is to build a higher growth, higher margin, simpler and more sustainable business.
City analysts are predicting a 17% rise in earnings in 2024 after a drop of about 10% in 2023. And against those expectations, the prospective earnings multiple is just below 14 with the price of today’s shares close to 183 pence.
That assessment seems fair to me. Though it’s worth keeping in mind that the business has a spotty profit record spanning several years. And earnings may not grow as expected if conditions remain difficult.
However, there is a decent looking dividend that pays well above 3% to keep shareholders company while they wait for growth to materialize.
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