With the FTSE 100 trading at around 7,200 points, it could be argued it is more challenging than ever to find good value shares. However, there are always buying opportunities in any market conditions and today is no different. Certainly, the outlook for the UK and global economies is unclear. But these two shares could deliver stunning total returns over the medium term.
Low valuation
Engineering support services company Babcock (LSE: BAB) has made a disappointing start to the year. Its shares have fallen by 8%, but this means they now trade on a valuation which is difficult to justify. For example, the company has a price-to-earnings (P/E) ratio of just 10.9, which indicates there is significant upward re-rating potential.
The company’s bottom line is due to rise by 8% next year and 7% the year after. This shows that its financial performance looks set continue to be strong after a number of years of impressive growth. In fact, in the last five years Babcock’s earnings have risen by 9.8% per annum. It appears to be a relatively consistent performer. As such, there seems to be scope for its rating to revert to its historic average of 14.5. Doing so would generate a capital gain of 33% even without factoring-in its earnings growth forecasts over the next two years.
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In terms of income potential, Babcock’s yield of 3.2% may appear rather lacklustre. However, dividends per share are expected to rise by 13.5% during the next two years, which should easily be ahead of inflation. And since the company’s shareholder payouts are covered 2.8 times by profit, there is scope for dividends to rise at a much faster pace than profit over the long run.
High growth
When it comes to consistent growth, equipment rental company Ashtead (LSE: AHT) is difficult to beat. In the last five years it has been able to increase earnings in every year, with net profit rising at a double-digit rate on an annualised basis. Looking ahead, we see a similar story. A rise in earnings of 22% this year and 15% next year is being forecast by the market. This could help to push Ashtead’s share price higher following its 90% rise in the last year.
Despite such a strong showing from its shares, Ashtead currently trades on a price-to-earnings growth (PEG) ratio of just 1. This indicates that there is significant upside potential on offer. While its shares may become volatile if global GDP growth comes under pressure, in the long run the company appears to have the financial strength and strategy to prosper.
It could also become a strong income play. Its dividends are covered four times by profit. So, while it only yields 1.6% at the present time, its dividend prospects are bright when the potential for profit growth is also factored-in. In fact, dividends per share are expected to increase by as much as 24.4% over the next two years, which puts it on a forward yield of almost 2%.
