LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:

  • Growth in earnings
  • An upward P/E re-rating

Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 Index (INDEX: ^FTSE), where the compound annual earnings-growth rate has been just 0.7% over the last five years:

Year to June







FTSE 100 index







Aggregate earnings per share







Consistent, cash-flow-backed growth in profits is a promising characteristic in today's markets, so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Tate & Lyle (LSE: TATE.L), which is a worldwide producer of sugars, sweeteners and related products. This table summarizes the company's recent financial record:

Trading year






Revenue (million pounds)






Adjusted earnings per share (pence)






So, earnings have averaged an equivalent 13.2% compound annual growth rate, putting Tate & Lyle in the Stalwart category.

Although known by many for its consumer products such as Splenda and Lyle's Golden Syrup, the firm actually generates around 75% of revenue from supplying additives for the food- and beverage-manufacturing sector. To achieve that, Tate is primarily involved in the businesses of corn wet milling and the production of high-intensity sweeteners.

According to the company, it uses large-scale manufacturing plants fitted with innovative technology to turn raw materials into ingredients that add taste, texture, nutrition, and increased functionality to products used by millions worldwide. That certainly sounds impressive, and it's reassuring to see that the business generated has led to steadily rising earnings over recent years.

Tate & Lyle's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:

  1. Growth: Revenue and earnings have been growing but cash flow has been erratic. 3/5
  2. Level of debt: At the last tally, net gearing was below 50%. 4/5
  3. Outlook and current trading: Good trading and a cautiously positive outlook. 4/5
  4. Enterprise value to free cash flow: Around twice the rate of earnings growth. 1/5
  5. Price to earnings: At around a historic 11 and below earnings growth rate. 3/5

Overall, I score Tate & Lyle 15 out of 25, which makes me cautious, although it is still possible for this stalwart to deliver earnings growth that outpaces that of the wider FTSE 100. When compared to the FTSE's price-to-earnings ratio of around 10, and the firm's growth predictions, the shares seem to price the company fairly.

Foolish summary
Although earnings growth has been steady, revenue has not been growing very quickly and cash flow has been lumpy. However, the company has been making good recent progress on reducing its borrowings, which is encouraging when viewed with the cautiously positive outlook.

Right now, forecast earnings growth is 7% for the year to March 2014, and the forward P/E ratio is around 11 with the shares at 653 pence. Considering that and the other factors analyzed in this article, I think Tate looks like a fully priced company.

Tate & Lyle is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.

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