Why Morgan Advanced Materials plc is a surprising growth stock I’d buy today

Ten pound notes

While the FTSE 100 is trading close to an all-time high, there are still a number of stocks which appear to be undervalued. Of course, their ratings may have increased significantly in recent months, but so too have their growth outlooks in many cases. As such, they could offer impressive capital growth potential for the long term.

One stock which seems to fall neatly into this category is Morgan Advanced Materials (LSE: MGAM). The engineering specialist reported interim results on Friday, and seems to be a sound buy at the present time.

Improving momentum

The company’s first half results may appear to be somewhat lacklustre a first glance. Revenue was only 0.2% higher than in the same period of the previous year, while headline operating profit edged just 1.5% higher.

But these figures hide the progress being made by the business. For example, it has made continued progress on its strategy implementation, with two divestments having been completed. They have helped to reduce the complexity of the business model and strengthen the balance sheet. Net debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) is now down to 1.1 times, while the company is on track to make the planned £6m incremental increase in research and development and sales capability.

These changes clearly mean some disruption and uncertainty for the business. However, in the long run they could lead to improved financial performance, as well as a more sustainable growth outlook.

Investment appeal

Looking ahead, Morgan Advanced Materials has a rather mixed outlook. In the current year it is forecast to record a fall in earnings of 6% as it seeks to implement significant changes to its business model. However, next year it is forecast to post a rise in its bottom line of 11%. This has the potential to create a step-change in investor sentiment over the medium term. That’s especially the case since the stock trades on a price-to-earnings growth (PEG) ratio of just 1.1 at the present time.

In addition, the company has a dividend yield of 3.7% from a payout which is covered around twice by earnings. This suggests there is scope for a rapid rise in shareholder payouts, which further enhances the investment appeal of the stock.

Growth potential

Also offering upside potential within the industrial sector is aerospace and defence company BAE (LSE: BA). It has endured a difficult number of years due to the challenges faced within the defence sector. Austerity programmes across the developed world have caused spending on a range of military items to fall, which has impacted on industry-wide demand levels.

In future though, defence spending is likely to rise across the globe. President Trump is seeking to bolster the defence capabilities of the US, while a potential end to austerity could be on the cards across Europe. This could lead to upgrades in BAE’s forecasts. With the company trading on a price-to-earnings (P/E) ratio of 13.9, now could be the perfect time to buy it for the long term.

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More reading

Peter Stephens owns shares of BAE Systems. The Motley Fool UK has recommended Morgan Advanced Materials. 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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