THE DAILY ENCRYPT

October 4, 2022

2 FTSE 250 shares I’d buy for April and beyond

Rupert Hargreaves explains why he thinks these FTSE 250 shares have tremendous growth potential over the rest of 2022 and beyond. The post 2 FTSE 250...
Photo by Shubham Dhage

I have been looking for FTSE 250 shares to add to my portfolio following recent stock market volatility. In particular, I am looking for companies I can buy at current valuations, which have attractive growth prospects over the next couple of years.

I am not interested in buying a firm just for a couple of months. I want to buy businesses with robust competitive advantages and an international footprint, qualities that should help them expand and grow over the next decade.

With that in mind, here are two FTSE 250 shares that I would buy for my portfolio today with a view to holding them for the next decade or so.

FTSE 250 global leader

Part of the global economy that is currently experiencing substantial growth is the resources sector.  Demand here has exploded over the past couple of years, and companies are struggling to keep up.

The result has been a substantial increase in commodity prices, and corporations in the sector are now throwing off cash.

With profits surging, businesses are looking to invest in increasing their capacity, and that bodes well for equipment manufacturers such as Weir (LSE: WEIR).

This corporation develops innovative engineering solutions for the minerals and mining markets. That includes equipment such as pipes and valves mission-critical infrastructure, which helps enterprises improve efficiency and increase output.

With a significant global footprint and 15,000 employees around the world, the company is one of the most trusted and experienced operators in the space. This in itself is a competitive advantage.

Mining businesses do not want to install equipment that breaks a couple of months after it has been delivered. They want to buy equipment from someone they can trust. The FTSE 250 company offers just that.

Sales growth

According to its latest results release, the business is already benefiting from the increase in capital spending. During 2021, orders increased 22% to £2.2bn. Growth accelerated towards the end of the year. In the fourth quarter, the value of orders placed with the group increased 26% year-on-year.

With profits growing, the company’s redeploying cash flow back into its business. It acquired Motion Metrics in 2021, increasing its exposure to technological solutions.

Management has also hiked spending on research and development to find new products. Outlay here increased to 6% of revenue during 2021, up around 0.4% on the previous year. Management believes that the corporation can achieve a similar rate of growth in 2022, based on current trends.

And it looks as if city analysts agree. Analysts have pencilled in earnings growth of nearly 40% in the current year. They have also projected growth of around 12% for 2023.

FTSE 250 projections

However, I should caution that these are just projections at this stage. There is no guarantee the corporation will hit these targets. Indeed, pressures are building across the engineering industry, which could hit the company’s growth in the years ahead.

Costs are rising significantly across the sector, with energy and materials costs putting tremendous pressure on manufacturing firms like the FTSE 250 business. Economic uncertainty resulting from the situation in Eastern Europe could also cause corporations to delay capital spending plans.

This would have a significant impact on the company’s order book and growth potential over the next few years.

Still, even after considering these charming challenges, I would acquire the FTSE 250 stock for my portfolio today, considering its competitive advantages and growth potential over the next couple of years.

Growth services market

The housing and home services market is one of the largest markets in the UK and indeed the world. And one of the best ways to invest in this market is with Homeserve (LSE: HSV).

This corporation is an international home repairs and improvements enterprise. It claims to make home repairs and improvements easier by matching customers to trades to generate repeat and recurring income.

Over the past couple of years, growth across the group has been nothing short of outstanding. Revenues have increased at a compound annual rate of 16% since 2016. Unfortunately, the company did suffer a setback during the pandemic, and profit growth hit a wall.

However, analysts expect the group to return to growth this year with a net profit of £161m pencilled in, up from £109m reported for 2019.

Bolt-on growth

Over the past couple of years, the company has developed and refined a unique growth strategy. As well as capitalising on the organic demand for its services in the UK and USA, it has been acquiring other home services businesses to complement growth.

The property services markets in the UK and US are highly fragmented. They are made up of a network of smaller traders. This presents a tremendous opportunity for the company to consolidate the market and use its economies of scale to push down costs and increase profitability.

That is precisely what the corporation has been able to do over the past six years.

FTSE 250 income stock

And as profits have grown, the company has been able to reinvest more back into the business and return cash to investors. The dividend per share has more than doubled since 2016 and, at the time of writing, the stock supports a dividend yield of 4.1%.

That said, I cannot take the company’s growth for granted. The cost of living crisis could force consumers to delay repairs to their properties, which would have an impact on growth.

Rising interest rates could also increase the cost of the corporation’s borrowing. It has relied heavily on borrowing in the past to fund its acquisition programme.

Higher interest rates could hit profitability and profit margins and lead to slower growth if the group is forced to delay further deals.

Despite these risks, I would be happy to add the firm to my portfolio of FTSE 250 shares, considering its growth potential over the rest of 2022 and beyond.

The post 2 FTSE 250 shares I’d buy for April and beyond appeared first on The Motley Fool UK.

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More reading

Here’s what I’m buying as the Stocks and Shares ISA deadline approaches
Best shares to buy now: how I’d invest £5k

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Homeserve and Weir. 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.

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