Today, I’m profiling two smaller companies with strong growth potential that I believe could be of interest to long-term investors.

AdEPT Technology

£94m market cap AdEPT Technology Group (LSE: ADT) is a leading independent provider of managed services for IT, unified communications (linking devices), connectivity and voice solutions. Its tailored services are used by thousands of customers across the UK, including the NHS. The stock has performed exceptionally well recently, rising 24% over one year and 190% over five, yet I think there could be more gains to come in the medium-to-long term.

AdEPT has enjoyed robust growth over the last five years (revenue CAGR 17.2%) and half-year results released today show that the company continues to have momentum. Indeed, for the six months to the end of September, total revenue increased 9.5% to £24.4m, adjusted earnings per share rose 11.7% to 14.5p, and the group increased its dividend by a healthy 15.3% to 4.9p per share. While these results perhaps aren’t as strong as some were hoping for (the shares are down 5% today), I think the numbers are solid in the current environment, as business spending is down due to Brexit uncertainty.

Looking at its metrics, there’s a lot I like about the stock. Return on equity is solid, averaging 23.5% over the last three years and dividend growth has been impressive, with the payout growing nearly 500% in just five years. The valuation looks attractive too, as the forward P/E is 12.7 and the P/E-to-growth ratio (PEG) ratio is just 0.64, which is very low. My only concern is debt, which is a tad high, and has increased in the recent half year. That’s something to keep an eye on. Overall however, I see considerable potential here.

dotDigital

Another small-cap that I like right now is dotDigital Group (LSE: DOTD). Its shares are up around 285% over the last five years.

Its key product is its email marketing platform ‘dotmailer’ – an advanced platform that enables companies to create, test and send data-driven automated email campaigns, and provides access to rich insights in real time. It’s worth noting that despite the rise of social media advertising in recent years, email remains a very popular marketing channel for businesses today, as it delivers a return of £39 for every £1 spent, according to the company.

Growth here remains strong, and in its most recent full-year results released in mid-October, the group reported revenue growth of 35% and adjusted basic earnings per share growth of 28%. Yet the shares have had a choppy year, due to concerns over GDPR earlier in the year and the recent small-cap/technology sell-off, and they can currently be picked up for 15% less than the price at the start of the year, on a forward P/E of 22.8. I think that’s a very reasonable price to pay for a slice of this high-growth business. As such, I rate the stock as a ‘buy’. 

The post Two FTSE 100-beating small-cap stocks I’d buy and hold for 10 years appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in dotDigital Group. The Motley Fool UK has recommended dotDigital Group. 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.

AdEPT’s sales increase was largely due to the five month revenue contribution from Comms Group, following its acquisition in May. In fact, Comms contributed around 12% of the revenue increase in the first half of the year, which means that excluding its impact AdEPT’s sales increased by a more modest 7%.

Of course, this still represents a strong performance in a highly competitive sector. AdEPT was able to enjoy considerable success in the public sector and healthcare space during the period. It won new contracts with organisations in those sectors as a result of its various framework agreements. This has seen an increase in contracts with 40 councils at the end of the interim period.

AdEPT’s transition from a traditional fixed line service provider to a complete communications integrator continues to progress in-line with expectations. Revenue from managed services including data connectivity, hardware and cloud-based contact centre solutions, rose by 53% and accounted for 53% of total revenue. Looking ahead, there is more potential for growth in this space, which could boost AdEPT’s overall financial performance.

In terms of its growth prospects, AdEPT is expected to grow its bottom line by 11% in the current year and by a further 1% next year. Beyond that, AdEPT has the potential to continue to grow as a result of its transition. AdEPT’s price-to-earnings (P/E) ratio of 11.8 indicates that it offers good value for money and a favourable risk/reward ratio.

Of course, AdEPT is a relatively small business and lacks the diversity, size and scale of other telecom and media companies such as Sky (LSE: SKY). In Sky’s case, it is also in the midst of a period of transition which will see it become a quad play operator when Sky Mobile is launched. This is likely to provide considerable cross-selling opportunities for Sky and could help to differentiate its offering versus other operators.

Although Sky trades on a higher P/E ratio than AdEPT of 13.6, it has a much lower risk profile. Not only is it better diversified, Sky has a more resilient earnings profile thanks to its operations spanning the UK, Germany and Italy. Its revenue stream is also more varied and this means that its growth outlook is arguably more stable and easier to predict than is the case for AdEPT.

As such, Sky seems to be a better buy than AdEPT at the present time based on the two companies’ risk/reward ratios. AdEPT may prove to be an excellent long term buy, but Sky offers a degree of stability in a highly competitive telecoms and media space.

The post Is AdEPT Telecom plc the best telco stock after profits soar? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.