Finding companies with impressive growth outlooks is not particularly difficult at the present time. After all, the prospects for the global economy are relatively upbeat. However, unearthing companies which offer high growth prospects at a reasonable price may prove much more challenging. In many cases, the market has already priced in their upbeat outlooks, and their margins of safety may be somewhat limited.
However, these two companies could offer surprisingly attractive risk/reward ratios due to their low valuations and high chances for growth.
Tuesday’s interim results from speciality chemicals company Elementis (LSE: ELM) showed it is making encouraging progress. For example, it was able to increase operating profit across all three of its main segments. Its sales growth of 24% was impressive and helped to boost adjusted operating profit by 26% versus the same period from the prior year. Furthermore, its outlook is unchanged and it remains on target to grow its operating profit across all three of its main business segments this year.
Elementis benefitted from short-term favourable conditions in Surfactants and the inclusion of the acquired SummitReheis business. Its Specialty Products division recorded adjusted operating profit growth of 18%, with strong growth in Personal Care and Energy, while Coatings saw steady revenue. The company’s Chromium division saw revenue move 18% higher, with the US resilient and there being stronger demand in the rest of the world. Surfactants were boosted by strong pricing conditions, although they are not expected to be sustained in the second half of the year. A sale of that business is now being pursued.
Looking ahead, Elementis is expected to report a rise in its bottom line of 23% in the current year, followed by further growth of 13% next year. Despite this strong outlook, it trades on a price-to-earnings growth (PEG) ratio of only 1.4. This suggests that it offers a wide margin of safety following share price growth of 8% since the start of the year and could be worth buying now for the long term.
Also offering an upbeat investment outlook in the same sector is Johnson Matthey (LSE: JMAT). The speciality chemicals company is forecast to grow its earnings by 9% in the next financial year. Although lower than the forecast growth rate of Elementis, it has the same PEG ratio of 1.4. This suggests the sector may be somewhat undervalued by the market at the present time, and there could be growth opportunities for shrewd investors.
As well as growth potential, Johnson Matthey also has income appeal. It currently yields 2.9% from a dividend which is covered 2.7 times by profit. This suggests that dividends could increase at a significantly faster pace than profit over the medium term, without hurting the financial strength of the business. With inflation moving higher, this could increase the investment potential of the stock and make it more popular in future. The end result may be a higher share price.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Elementis. 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.