Dixons Carphone (LSE: LON:DC) has had a rough time over the past 24 months, and it does not look as if the company’s outlook is going to improve substantially anytime soon.
However, right now, shares in the business are trading at such a low valuation that I think investors buying today could pocket substantial profits even though Dixons’s earnings are not expected to return to growth perhaps until 2021.
Indeed, at the time of writing, shares in the company are changing hands at a forward P/E ratio of around 5 compared to the market average of 12.7. This implies that when growth returns, the stock could rise 100% from current levels. Granted, it is going to be some time before turnaround starts to bear fruit. Last week the firm said it expects to report overall headline profit before tax for the current year of £210m, down from £298m last year. Nevertheless, management seems confident that growth will return in the second half of the next decade.
In the meantime, shares in this consumer electronics business will pay a dividend of 6.75p per share this year, giving a dividend yield of 6% at current prices.
Surging profits Another undervalued FTSE 250 stock that I think could double from current levels is OneSavings Bank (LSE: OSB). This challenger bank has carved out a niche for itself in the buy-to-let lending market over the past nine years. As the company has won over new customers with its refreshing lending proposition, net profit has increased at a compound annual rate of 39% since 2013, rising from £27m to £140m for 2018. City analysts are expecting this trend to continue for the next two years. Net profit is expected to hit £172m in 2020, which implies the bank will report earnings per share of 65.8p for the year, giving a 2020 PE of 5.8.
In my opinion, this valuation severely undervalues the bank and its prospects. Considering OneSavings is one of the fastest growing banks in the UK, I think it deserves a premium valuation to the rest of the banking sector, which is currently dealing at a median P/E multiple of 7.6.
And as well as the discount valuation, the stock supports a dividend yield of 4.4%, which analysts believe will hit 5% in 2020 as the group increases its distribution to shareholders in line with earnings growth.
Boring but essential TI Fluid Systems (LSE: TIFS) isn’t the most exciting business on the market, but when it comes to undervalued growth, this company looks to me to be a steal. The firm manufactures fluid storage, carrying and delivery systems primarily for vehicles, and over the past few years, revenues have increased at a compound annual rate of 7%.
Net profit has risen from just €13.4m in 2014 to €138m for 2018 and City analysts are expecting the group to report €151m of net profit in 2019. However, despite this explosive growth, shares in the company are currently dealing at what I believe to be a discount valuation of just 6.4 times forward earnings.
On top of this attractive multiple, the stock supports a dividend yield of 4.5%, which analysts believe will increase to 4.8% next year with scope to rise above 5% by 2021 as management continues to hike the dividend in line with earnings growth. The payout is covered 3.3 times by earnings per share, leaving plenty of room for further increases in the years ahead as well.
Rupert Hargreaves owns no share 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