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5 stocks tipped for growth in 2018

Glenn Freeman  |  08 Jan 2018Text size  Decrease  Increase  |  
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These five companies spanning a range of sectors are tipped to provide good earnings growth over 2018 and beyond, according to Morningstar analysts.

All are regarded as holding economic moats of competitive advantage, stemming from at least one of the following sources: cost advantage, intangible assets, switching costs, efficient scale, or network effect.

For each of the following, we used our stock screener tool--available to Morningstar Premium subscribers--to determine which companies under Morningstar analyst coverage have strong earnings per share (EPS) growth expectations over the next year.

1. Energy

In the case of AGL Energy (ASX: AGL), one of Australia's largest integrated energy companies, its narrow moat stems from its low-cost thermal generation capacity and vertical integration cost advantages.

Morningstar senior equity analyst Adrian Atkins increased his medium-term earnings forecast for the company in December, "to factor in more meaningful cost efficiencies and recently announced generation projects".

He believes AGL is well-placed to adapt to the changing industry, "with both strong free cash flows and a strong balance sheet".

"Key attractions for shareholders include defensive earnings, regular dividends, and low gearing.

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"Earnings are dominated by energy generation and procurement, with energy retailing about half the size, and energy infrastructure assets divested in 2006," Atkins says.

The company's strategy is heavily influenced by government energy policy, such as the renewable energy target.

"Growth opportunities and competition increased following the privatisation of government-owned energy assets and the deregulation of energy markets. Strong operating cash flow enables payment of reliable mostly-franked dividends, an enhanced attraction in a low-interest-rate environment," Atkins says.

"Net debt-to- earnings before interest, tax, depreciation and amortisation should be around 1.6 times in fiscal 2018, and stay below two-times for the foreseeable future. This compares favourably to peers," he says.

2. Automotive

Bapcor (ASX: BAP) is a supplier of automotive after-market parts and accessories, including specialist wholesale, trade, retail, and services in both Australia and New Zealand.

With anticipated EPS growth of more than 26 per cent for 2019, Morningstar equity analyst Daniel Ragonese is "optimistic about the outlook for the automotive parts industry, particularly the trade segment".

This generates around 50 per cent of group earnings, and is fundamental to the company's narrow moat rating.

"Bapcor's extensive range of inventory, the convenient locations of its stores, the technical expertise of staff, and its track record of meeting the needs of workshops have all contributed to its intangible brand assets," Ragonese says.

Morningstar's fair value estimate (FVE) was recently increased to $7 a share, from $5, "reflecting an 18 per cent increase in our earnings per share forecasts during the next 10 years, which we now expect to grow at around 13 per cent annually," Ragonese says.

3. Healthcare

Within the healthcare space, hearing implant technology firm Cochlear (ASX: COH) holds a wide moat rating from Morningstar.

"We remain positive on the company’s prospects in the cochlear implant market, given its innovative leadership position, clinical reputation and strong product portfolio.

"We also believe low penetration of the addressable market provides a long-term runway, and consider recent engagement initiatives targeting older adult segments in developed markets as significant changes in strategy," says Morningstar equity analyst Chris Kallos.

Though he notes the share price of $175 as of 8 January, 2018 is above the $148 fair value estimate. "We think shares at current levels reflect overly optimistic growth assumptions across all markets and underestimates challenges in developed markets and the threat of new entrants," Kallos says.

4. Healthcare

Another narrow moat-rated healthcare stock, ResMed (ASX: RMD) is a developer of medical devices for the treatment of sleep apnoea and other respiratory problems.

"With its admirable innovative capabilities, we expect the company to deliver solid returns in the long run, and we look forward to seeing what it develops next," says Kallos.

He believes an ageing population, coupled with accelerating obesity trends, "should drive significant growth in ResMed's target sleep apnoea market".

Though it faces significant competition from the likes of Philips Electronics, Kallos says ResMed "continues to impress with innovation that has successfully combated price erosion, and has prevented any decline in returns on capital".

The company was trading at Morningstar's $11 a share fair value estimate at the time of publication.

5. Food and beverage

Domino's Pizza (ASX: DMP), another narrow moat company, rounds out the list, with Morningstar pointing to strong sales in Europe and ongoing sales growth in Australia, New Zealand and Japan.

"Europe is the key growth region for Domino’s, and we estimate same store sales growth to average 4 per cent over the next five years," says Morningstar equity analyst, Johannes Faul.

"We forecast the European business to be as large as the Australia and New Zealand segment in terms of EBITDA by fiscal 2022, both regions accounting for 40 per cent of group EBITDA then," Faul says.

He notes Domino's limited capital requirements also translate into royalty payments, "making returns on investment capital very attractive."

"Brand and scale are key competitive advantages warranting a narrow economic moat rating, and future growth prospects are significant," Faul says.

"Despite significant growth during recent years, Domino's is by no means a mature business."

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Glenn Freeman is Morningstar's senior editor.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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