How SSE Measures up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price", or GARP, strategy. This theory uses the price-to-earnings-to-growth, or PEG, ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below one is generally considered decent value for money.

Today I am looking at SSE  (LSE: SSE  ) to see how it measures up.

What are SSE's earnings expected to do?

 

2014

2015

EPS Growth

(1)%

6%

P/E Ratio

13.3

12.5

PEG Ratio

n/a

2

Source: Digital Look

SSE is expected to record a slight earnings per share (EPS) decline in the year ending March 2014, although a modest rebound is penciled in by City forecasters for 2015.

SSE's earnings dip this year rules out a valid PEG ratio, while next year's slight improvement yields a reasonably expensive reading above one. Meanwhile, the firm's price-to-earnings, or P/E, ratio is expected to remain above 10 over the medium term -- a readout below this is regarded as decent value for money.

Does SSE provide decent value against its rivals?

 

FTSE 100

Electricity

Prospective P/E Ratio

16.9

24.4

Prospective PEG Ratio

4.7

n/a

Source: Digital Look

SSE compares extremely favorably with the FTSE 100 and wider electricity sector when it comes to the P/E rating. However, a forecast lack of earnings growth matches that of its electricity peers and thus fails to produce a reading.

It is worth comparing SSE with fellow energy play National Grid -- classified in the gas, water, and multi-utilities sector -- whose projected 3% EPS drop for this year also fails to produce a workable PEG rating. It also carries a P/E multiple of 14.4, fractionally above SSE's equivalent.

Clearly SSE does not represent a decent pick for those seeking exciting GARP stocks, but I believe that its strong defensive operations in the energy market, combined with heavy investment in recent years, makes it a strong contender for those seeking solid growth over the longer term.

Customizable conclusion
SSE announced late last month that adjusted profit before tax advanced 5.6% in the previous year to £1.4 billion, boosted by last winter's extended cold snap. The company noted that average electricity consumption in Britain advanced 5% during the period, while gas demand surged 21% higher. However, the number of its own customers did slip 0.8% during 2012 to 9.5 million.

SSE has noted that uncertainty surrounding reforms to the electricity market is causing investment in new generation capacity to be delayed. Still, the company has invested heavily in recent years which I think should underpin earnings growth over the long term -- the firm has spent £4.6 billion since 2010 in expanding and enhancing its asset base.

Although I believe SSE lacks a compelling earnings growth case in the meantime, the stock is a great dividend pick -- yields of 5.6% and 5.9% are expected this year and next -- and is worthy of serious consideration from income investors.

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