With any share purchase, it's important not to overpay. Many times, there are things happening in the business that can suggest that a price is a good or a bad one, regardless of how the company is priced on conventional metrics like the Price to Earnings (P/E) ratio.
At the same time, it's equally important not to be 'penny wise and pound foolish' by quibbling over a company that is 20% overpriced when you think it could become 5x larger in the next 10 years. Here's my take on the following 3 growth companies:
CSL Limited (ASX: CSL)
Priced at more than 30 times last year's earnings, CSL Limited looks expensive, and indeed several well-known fund managers have commented on this in recent times. However, offsetting the price is a group of highly experienced executives with long tenures with the company, a strong collection of new treatments in the pipeline, strong market share, and the unprofitable Seqirus vaccine business (currently hurting earnings) undergoing a turnaround.
I'd like to own CSL and would call it somewhere between a hold and a buy depending on your optimism for the company's research pipeline over the next decade.
Ardent Leisure Group (ASX: AAD)
Ardent Leisure's core business is operating bowling alleys and theme parks in Australia, plus the Main Event family entertainment centres in the United States. With the recent sale of several non-core assets, the business is cashed up and poised to expand rapidly. However, management has noted that the pace of the rollout will slow in the near term as the business deals with competition, and there are already early signs of underperformance.
With $13 million in core earnings at the most recent half and a market capitalisation of $961 million, Ardent looks to be quite overpriced. I'd call it either a hold or a sell, depending on how optimistic you are about the Main Event business.
Nearmap Ltd (ASX: NEA)
Small growth company Nearmap has seen its shares yo-yo up and down over the past 12 months as investors are by turns optimistic and then pessimistic about the company's growth prospects. This aerial mapping business has a ~15% market share in Australia and less than 1% in the USA, and has been steadily growing its position through sales to new customers and by developing new products for existing customers.
While competitive pressures are real and the business is unprofitable, I'd call it a buy at today's prices.
