Shares of healthcare firm ConvaTec (LSE: CTEC) and travel operator FirstGroup (LSE: FGP) have performed strongly this year. Looking ahead, I believe both these FTSE 250 stocks can continue to deliver. Here are the reasons why I’d buy them today for 2020.
Fundamentally attractive
ConvaTec is a stock I originally tipped far too soon after it debuted on the stock market in 2016. I’m generally cautious on new arrivals until they’ve built up a record as a publicly-listed company, but I was swayed by CTEC’s market-leading products and technologies for the management of chronic conditions.
The company soon reported a number of operational issues, and the share price suffered as a result. However, I continue to see the business as fundamentally attractive, with ageing populations being a structural driver for growth. The shares have climbed around 50% since I kept faith with the company earlier this year. Events since, including a Q3 trading update today, have persuaded me there’s more to come.
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On track
With a new chairman and chief executive, ConvaTec reported a Q3 performance in line with management expectations, and said its transformation initiative is on track. Advanced wound care produced organic revenue growth of 3.6% for the period, and with ostomy care (+3%), continence and critical care (+8%), and infusion devices (+4.3%), there was growth across all franchises.
Management left its guidance for the full-year unchanged. Namely, group organic revenue growth of 1% to 2.5%, and an adjusted EBIT margin of 18% to 20%, including spend associated with the transformation initiative and costs to implement new medical device regulations.
Plans and progress
Highly-rated chief executive Karim Bitar, who joined the company just a month ago, said: “I look forward to giving an update on our plans and progress next year.” I’d expect this to be alongside full-year results in February.
At a share price of around 200p, CTEC trades at 20 times current-year forecast earnings. I’m hopeful Bitar’s plans for growth, an ongoing reduction of debt, and an improving business performance could see the share price continue to head north through 2020.
Portfolio rationalisation
FirstGroup announced its annual results back in May, along with a strategy update for its portfolio of five market-leading public transportation businesses in the UK and North America. It intends to make the latter its core market, centred on its contract-based operations First Student and First Transit. It said a formal sale process is underway for its iconic Greyhound intercity coaches business.
In the UK, it’s pursuing structural alternatives to separate its First Bus operations from the group. The long-term future of its First Rail business isn’t entirely clear yet, as management awaits the outcome of the UK government’s review into the structure of the whole rail industry.
Unlocking value
There’s been no further news on the portfolio rationalisation since the plans were announced in May. Meanwhile, at a share price of 129p, the group, as is, trades at 8.9 times forecast current-year earnings.
I’m convinced management is pursuing a strategy that will ultimately unlock value for investors, and I expect to see the shares rate higher through 2020. We should have an update on the rationalisation of the portfolio as early as the company’s half-year results on 14 November.
