Are these two FTSE 250 growth stocks getting too pricey?

Paysafe

Mobile payment and digital wallet specialist Paysafe Group (LSE: PAYS) has been coining it lately, with the share price up 54% in the past six months. Over five years it is, incredibly, a 10-bagger, having grown 1,160% in that time…. no, my mistake, an 11-bagger. Wow.

Safe bet?

With growth like that we would expect the stock to be rather expensive, especially given the current heady technology stock valuations. In that respect, a P/E of 22.2 times earnings looks almost cheap. Paysafe’s big breakthrough came in 2016, when pre-tax profits soared from $11.81m to $167.99m, while earnings per share (EPS) rose a rarely seen 1,350%.

In that context, forecast EPS growth of ‘just’ 70% in 2017 looks tame, and 11% in 2018 positively under-achieving. Please do not buy this stock expecting it to turn into another 10, sorry, 11-bagger. Paysafe is now anticipating low double-digit organic growth revenue for full-year 2017, with management reporting that the company is performing as expected so far.

On the money

The Isle of Man-based firm, formerly known as Optimal Payments, also continues to de-lever even after returning £22.4m of capital to shareholders in the form of a share buyback during the first three months of the year. This cash generative business has worked hard to pay down its debts.

Investors who bear the scars of investing in troubled mobile payments player Monitise, destroyed by Apple Pay, will not need reminding that it is a precarious area. Paysafe is diversifying from its niche of servicing the gambling industry, and with a market cap of £2.48bn this is no vulnerable start-up. The future still looks promising, but it isn’t for those who like to play safe.

Steep ascent

After all that excitement, growth at Ascential Group (LSE: ASCL) looks rather humdrum by comparison. It is up a mere 71% since first listing on the London Stock Exchange around 18 months ago, and 34% over 12 months. This global business-to-business media company now has a market cap of £1.37bn, and declared its maiden interim dividend of 1.5p per share last August.

Formerly the publisher known as Emap, Ascential is looking to accelerate its growth spurt by selling off 13 of its ‘heritage’ brands, to focus on those with higher growth potential. They have been shifted into a separate operating entity with its own business strategy while buyers are sought out.

Old trade

These are all familiar names from my days in the business press, including reputable names such as Health Service Journal, Drapers, Nursing Times, Construction News, New Civil Engineer and Architects’ Journal, so I am sad to see them hived off as low growth businesses. On the other hand, I applaud Ascential’s ruthlessness in prioritising faster growing sectors.

Ascential posted EPS growth of a whopping 285% in 2016 but that is forecast to fall to 11% this year, then climb slightly to 13% in 2018. Profit growth is also likely to slow, rising only slightly from £98.29m this year to £102.69m next. One consolation is that you will get a 2% yield by then, if forecasts are correct. Its current valuation of 84 times earnings look pricey, but that is forecast to drop to just 20 times. Ascential still tempts, but again, I fear you may have missed the real action.

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More reading

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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