I wanted to share with you two companies that are in bargain territory compared to the kind of growth they could achieve.
If you think their share prices have risen too much, you can always wait a little to see if you can buy on a pullback or minor correction. I am looking more at the business side. These two have bright earnings potential that makes current price levels comparatively cheap.
Investment bank Macquarie Group Ltd (ASX: MQG) stands at a PE of 16, which is at the top of its historical average PE range, yet the growth prospects over the near term are good and would suggest rising earnings.
Its share price has risen almost 20% in the past six months and has climbed past $50. It has a dividend yield of 4.17%. The company stated in its outlook update that it expects its full year 2014 result to be about 40%-45% higher on FY2013.
That may be priced into the current share price. However, the catalysts for this growth will still be in play for the near future. More earnings gains are possible, so what is currently a 16 PE may be a fair bit lower relatively as we go forward. That would be a bargain for possible future returns.
ResMed Inc. (ASX: RMD) has a PE of 18, which is a little less than its sector's 19.8 average PE. Net profit growth over the past five years has been strong with a compound annual growth rate of around 23%.
Analyst forecast growth is for about 15% over the next two years. Assuming it can achieve some level between those two figures, coupling that with a 2.30% dividend yield, the 18 PE may be less than the potential earnings growth and dividend combined. That puts it into potential bargain territory.
Compared with its historical PE averages, 18 is relatively low. It has been in the mid to high-20s a number of years in the past.
Foolish takeaway
Sometimes we can see the potential of companies to increase earnings and send share prices up, but because we can't exactly say when that will happen, we may be put off from buying. That's why you have to concentrate more on the business than the share price when assessing its potential.
If you have the conviction that a business will have greater earnings in the future than now, that is where you place your confidence.
