Finding stocks that offer defensive growth may seem like an impossible task and also a contradiction in terms, but such companies are not that difficult to unearth.
Indeed, there are a number of large-cap companies out there which are growing steadily in relatively defensive industries. Catering company Compass (LSE: CPG) is one such example.
Over the past six years, Compass has gone from strength to strength as the business’s strong foundations have helped it grow organically and through bolt-on acquisitions.
Between 2011 and 2016 its revenue increased by an average of 4.4% per annum from £15.8bn to £19.6bn. For the fiscal year ending 30 September 2017, analysts are expecting the company to report revenue of £22.9bn and a pre-tax profit of £1.6bn, up more than 100% from 2012’s figure of £789m. As Compass’s top line has grown steadily over the past five years, its bottom line has expanded even faster as management has sought to extract economies of scale from the ever-growing business.
Over the past six years, earnings per share have risen at a compound annual rate of 9.4% and analysts have pencilled-in a 19% hike for this financial year. The big question now is whether or not the company can continue to grow at its historic rate, or are its best days are now behind the company?
Further growth ahead
I would be willing to bet that the corporation can continue to increase earnings at least at a single-digit rate for the foreseeable future. A large part of Compass’s growth over the past six years has come from acquisitions, and the firm is well placed to continue this strategy.
Its size means that it is well positioned to extract synergies from any bolt-on acquisitions, and free cash flow per share of 58.5p means that the company has plenty of money to invest in growth without having to rely on debt. Put simply, even though shares in Compass might seem expensive at current levels as they trade at a forward P/E of 21.4, the company’s steady growth and defensive nature is certainly worth paying a premium for.
Shire (LSE: SHP) is another company that exhibits both defensive and growth qualities.
It’s hard to find a company that is more defensive than Shire. The group’s portfolio of rare disease treatments is one-of-a-kind and demand for these products is only likely to rise for the foreseeable future.
What’s more, Shire has been investing heavily in developing new treatments through both organic R&D and acquisitions. Thanks to the acquisition of peer Baxalta last year, its earnings per share are expected to come in at 400p for 2017, and pre-tax profit is expected to hit £4.4bn, that’s up from £1bn as reported for 2012.
Analysts are expecting further growth next year with earnings per share hikes of 15% projected. However, despite Shire’s explosive growth and defensive nature, shares in the company currently trade at a forward P/E of only 11.3. This valuation seems just too cheap to pass up especially considering the company’s defensive nature.
Finding the market’s best stocks
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Shire. 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.