With the consequences of Brexit still very much a ‘known unknown’, it’s understandable that many investors are beginning to wonder which companies they should back to ensure their portfolios are sufficiently resilient should the UK economy enter a protracted sticky patch.
Today, I’m looking at two businesses which, thanks to their line of work, should be able to keep growing whatever the economic weather. The question is whether they’re worth buying at their current prices.
If all investment decisions were based on how exciting or attractive the companies were, Rentokil Initial (LSE: FLTA) would be unlikely to feature on many investors’ watchlists. The FTSE 100 giant is the world leader in pest control — about as far removed as you can get from a sexy tech stock.
Despite this, Rentokil’s shares have been on a tear over the last 12 months, rising over 45% following some very positive trading. Despite operations in the US being impacted by poor weather during Q2, for example, July’s interim results showed a 4.2% rise in organic revenue — the company’s highest growth rate in H1 for over 10 years.
The comforting thing about Rentokil’s line of work, of course, is that pests continue to thrive in good times and bad. The fact that it already operates in over 70 countries (and continues to acquire smaller rivals at a fair clip) should also help to mitigate any impact of Brexit.
As mentioned above, however, adding this company to your holdings won’t be cheap. Rentokil’s shares currently trade on almost 33 times earnings. Even the most bullish market participants would say that’s expensive for any stock, especially as there are plenty of other companies operating in non-cyclical industries available for much less.
For now, I’d be tempted to see what happens when a third-quarter trading update lands on 17 October. Should a wave of profit-taking follow, the valuation could become a little more attractive.
Small-cap Filta Group (LSE: FLTA) could also be worth looking at even though, once again, it’s not cheap to buy.
The company specialises in the unglamorous business of removing fat, oil, and grease from commercial kitchens. This month’s interim results, however, were far from unpleasant.
Revenues rocketed 86% to £12.2m over the first six months of 2019 with £4.2m of this coming from its acquisition of peer Watbio. Adjusted pre-tax profit rose a healthy 14% to £1.3m.
Elsewhere, a forecast yield of 1.5% might generate guffaws from those investing for income, but it’s worth highlighting that the interim dividend was increased by 39% from the previous year to 1p per share. As we never tire of saying at the Fool UK, fast-growing dividends are indicative of healthy businesses and, for this reason, are often preferable to sky-high yields that prove unsustainable.
Filta is also doing its best to expand in markets other than the UK with “steady growth” in franchise numbers reported in North America and Europe. According to CEO Jason Sayers, the fact that its services are only being used “by 2% or less of the available markets in each geography” gives the company a lot of ‘white space’ to target. Increased regulation relating to hygiene should also act as a tailwind.
Like Rentokil, Filta’s valuation is high at 37 times forecast earnings. Nevertheless, a price-to-earnings-growth (PEG) ratio of below 1 suggests investors should still get a lot of bang for their buck.
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Paul Summers has no position in any of the 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.
Motley Fool UK 2019