What management doesn’t seem to have expected was a shortfall in orders during the first half of the current year. Shares in the Solihull-based firm fell by more than 20% in early trade on Wednesday, after the company said that pre-tax profit fell by 14% to £28.9m during the first half of the year, despite a 1% rise in revenue.

Chief executive Derek Muir said that delays to spending on road and utility projects were to blame, along with “a more cautious UK investment environment”. An increase in raw material costs also hit the firm’s operating profit margin, which fell from 13.3% to 11.7%.

Although performance is expected to improve during the second half, Mr Muir doesn’t expect to make up this shortfall. I see this as a profit warning, and the stock’s 20% haircut suggests that other investors share my view.

Still a good business

In my view this remains a good business for long-term investors. This company has a long history of stable profit margins and strong cash generation. The dividend should remain safe, and Hill & Smith’s focus on products which must pass tough regulatory standards means that it’s not readily undercut by cheaper rivals.

However, today’s news suggests to me that profits during the second half of the year could also be lower than expected.

After today’s fall, I estimate the stock trades on a P/E of about 15. That’s not especially cheap, so I think it makes sense to wait for an update on trading before putting fresh money into this stock.

Unloved and unwanted

Utility companies are under pressure to cut costs. This could be bad news for Hill & Smith, but it might be good news for Centrica (LSE: CNA), whose stock is trading at 15-year lows.

Price caps, the threat of renationalisation and cut-throat competition from smaller rivals are all causing problems for the big utility companies. This sector is seriously out of favour. But for Foolish investors, I believe there could be an opportunity here.

Higher energy prices could lift profits

The group’s recent half-year results showed a 4% fall in adjusted operating profit. And at £1,252m, last year’s operating profit was only half the £2,586m reported in 2013.

Centrica shares have fallen by more than 60% since September 2013, and are now priced for a pretty dire future. In my view, this gloomy outlook is overdone.

The group’s finances remain stable and the shares now trade on just 11 times 2018 forecast earnings, with a dividend yield of 8.1%. Although this generous dividend is still at risk of a cut, even a 25% cut would still provide a 6% yield.

Centrica still faces problems, notably at British Gas, where customer numbers are continuing to fall. But there are early signs of progress, and higher energy prices should benefit other parts of the group’s business.

At current levels, I think this utility stock could be a good turnaround buy.

The post Why I’d shun 20% faller Hill & Smith and buy Centrica’s 8% yield appeared first on The Twelfth Magpie.

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Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. 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.

Structural steel group Severfield (LSE: SFR) is a useful barometer of the state of the UK economy. It produces steel for buildings, bridges and even stadium roofs. If orders dry up, then we might need to start worrying about a slowdown.

Happily, there’s no sign of this yet. The company said today that full-year profits should be in line with expectations, which were upgraded in November. Market conditions appear to be stable as the group’s UK order book of £242m is almost unchanged since November’s £245m.

Management say that these figures are “in line with our normal order book levels” and reported a balanced mix of demand across “all key market sectors”.

A risk in India

This company also has a second division, which operates in India. Conditions here are also said to be good, but I think it’s worth noting that the order book has fallen from £79m to £65m since the start of November.

If this trend continues it could become a concern, but for now I’m prepared to trust management guidance that the business is delivering a “good operational performance”.

I’d keep buying

Today’s update suggests to me that short-term growth may be limited. But Severfield has taken big steps to improve its profit margins and strengthen its balance sheet over the last couple of years.

Looking ahead, the stock trades on a forecast P/E of 11 with a prospective yield of 3.5%. If market conditions remain stable I’d expect another round of growth over the next year or two. In the meantime, I’d be happy to keep buying at this level.

Boring but very profitable

Engineering firm Hill & Smith Holdings (LSE: HILS) makes “engineered products for the roads and utilities markets”. These include products such as crash barriers, street lights, steel ladders, gratings and much more. Other customers include the energy and chemicals sectors.

A wide mix of customers and operating countries helps to smooth out peaks and troughs in demand. But what really makes this business special is that many of the group’s products have to meet demanding specifications and safety standards. This means that it’s not easy for competitors to enter the market.

Strong figures

This defensive moat makes the business surprisingly profitable. The group’s underlying operating margin rose from 13.1% to 13.9% last year, while return on capital increased from 14.3% to 18.4%.

Hill & Smith is continuing to expand through regular small acquisitions, but strong cash generation means that this hasn’t resulted in high debt levels. Net debt was just £99m at the end of last year, which looks comfortable to me when compared to operating profit of £74.1m.

A dividend hero?

Hill & Smith’s quality is no secret. The company’s share price has risen by 85% over the last three years as investors have bought into the group’s success. One particular appeal is the firm’s dividend, which has risen from 4.2p per share in 2002 to 30p per share today.

The stock currently trades on 17 times forecast earnings with a prospective yield of 2.5%. Although this isn’t cheap, I believe it’s a fair price for a quality long-term stock. I’d be happy to buy today and average down during market dips.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

According to conventional financial theory, past performance is no guide to the future. In practice, though, it has long been recognised that price momentum exists in financial markets. Although researchers aren’t entirely certain sure why a stock’s past performance is a causative factor on future share price returns, the effect has been shown to be fairly consistent over time.

With this in mind, here are two momentum stocks that are certainly worth a closer look for small-cap investors.

Market leader

Georgia Healthcare Group (LSE: GHG) may be a small-cap stock, but as the name suggests, the company is a market leader in the fast-growing Georgian healthcare services market. And as the company is the largest healthcare services provider in the country, in terms of hospital bed capacity and medical insurance, it benefits from significant economies of scale, which gives it a cost advantage and throws up barriers to entry for competitors trying to enter the market.

This should mean that it would be difficult for rivals to disrupt the firm’s strong competitive position and wear down its market share and profitability. The company therefore benefits from a wide economic moat, a perk usually only reserved for larger businesses.

Shares in Georgia Healthcare Group are up 132% year-to-date, but I think further gains may be yet to come. The firm is fast-growing, with the shares currently trading at 21 times its expected 2017 earnings and it potentially paying its first dividend over the next few years.

FX tailwinds

Another stock with great price momentum is specialist engineering group Hill & Smith Holdings (LSE: HILS). The Infrastructure products supplier and galvanising services group is a major beneficiary of the weaker pound, thanks to its significant sales presence in the US and a large cost base in the UK.

It’s set to benefit from recent promises to boost infrastructure spending in the UK and US, as it’s a leading supplier of permanent and temporary road safety barriers. In the UK, the implementation of the Government’s Road Investment Strategy has already lifted demand for its temporary safety barrier, with further gains likely to come from the installation and maintenance of street lighting, road signage and traffic management systems.

Underlying revenue for the four months leading to 31 October 2016 rose 15% to £185m, with FX tailwinds contributing £9.1m of the gain, equivalent to 6% of its total revenues. Looking forward, City analysts expect the group to post a 24% increase in underlying EPS for the full year, with a further 8% gain in the following year. This gives the stock a forward P/E of 19.3 for 2016, which is due to fall to 18 by 2017. And although the stock has a current yield of just 1.7%, an expected dividend rise of 20% this year gives it an indicative forward dividend yield of 2% for next year.

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

On the Hill

Investors in infrastructure and galvanising specialist Hill & Smith Holdings (LSE: HILS) quickly put out the bunting for Trump, its share price rising 8.73% on the day after the election. Yet this UK company has been waving flags for far longer than that, with the stock soaring 82% in the last 12 months and 405% over five years. This week was merely the icing on a very rich cake.

Wednesday’s surge was driven by hopes that the international group would be a major beneficiary of Trump’s promise to splurge $1trn on “rebuilding America”. We all know how fragile electoral pledges are, especially The Donald’s, but this one seems to rest on more solid foundations than most.

The Smiths

In August, chief executive Derek Muir was already talking up the opportunities for road and utility infrastructure development in the UK and US, the two markets that generate around 90% of its revenues. Trump could double down on those US opportunities, and if Chancellor Philip Hammond follows suit by announcing UK fiscal stimulus in this month’s Autumn Statement, Hill & Smith could reap the benefit at home as well.

It has momentum on its side, but although the valuation is expensive at 24 times earnings, that’s forecast to fall to a more reasonable 16 times, helped by 20% forecast growth in earnings per share (EPS) this year, with another 8% predicted for 2017. The forecast yield underwhelms at 2% but it’s covered 2.5 times, and management is progressive, increasing the interim dividend 20% in August. With a forecast price-to-earnings growth (PEG) ratio of just 1, investors in Hill & Smith have a Trump card up their sleeves. 

Cardinal Wolseley

Plumbing and heating merchant Wolseley  (LSE: WOS) generates 66% of group revenues and 89% of group trading profit from its US business, plumbing supplier Ferguson, and therefore enjoyed a major Brexit boost as the pound slumped against the dollar. This stock has also performed strongly for some time, rising 148% over five years and 26% over the last 12 months. Private investors often snub long-term growth stories like Wolseley because they operate in relatively unglamorous areas, so make sure you’re plugged in.

The company announced job cuts and branch closures in September, citing difficult trading conditions in the UK and Nordics, despite posting a 7% increase in annual trading profit to £917m. It also complained of subdued demand in its core US commercial and residential markets, but Trump’s proposed infrastructure blitz might quickly change that. Five years of positive EPS growth are expected to extend into next year, with a forecast 16% leap in the year to 31 July 2017. This kind of growth prospect doesn’t come at a discount, but a forecast valuation of 16.8 times earnings isn’t overly expensive either.

The forecast yield is low at 2.2%, although nicely covered 2.5 times, giving hopes for progression. Again, Wolseley is a growth rather than income stock right now, and a tempting Trump reflation play.

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Heady valuation

The Oxford-based electronics firm certainly isn’t expecting a downturn anytime soon. Indeed, in a recent trading statement ahead of interim results next month, management says it now expects a big leap in pre-tax profits for the first half of its financial year, helped by a boost from the weaker pound. The company expects to achieve pre-tax profits of around £54m, compared to the £31.3m reported for the same period last year.

Management is projecting underlying sales growth of around 2% in the first half, with a stronger performance in the second quarter driven by a return to growth in North America and better trading trends in Asia Pacific. The company says both Northern and Southern Europe have continued to see good growth, which has helped offset some softness in Central Europe.

Brokers too seem optimistic about the firm’s prospects, with consensus estimates predicting a 27% rise in underlying profits this year, with a further 11% improvement in FY2018. However, the monumental share price surge over the past 12 months leaves Electrocomponents trading on a heady valuation of 23 times forward earnings. I feel the optimistic earnings outlook is more than baked into the price, leaving the shares exposed to a short-term sell-off.

Wait for it

Another mid-cap firm enjoying strong share price appreciation over the past 12 months is infrastructure products and galvanising services company Hill & Smith Holdings (LSE: HILS). The firm’s share price continues to reach new highs even after a fivefold increase in the last half-decade, supported by an upward earnings curve stretching back to the start of the millennium. But as we’ve seen with Electrocomponents, solid earnings growth can sometimes come with a hefty price tag.

Back in August, the Solihull-based engineering firm cranked out a gleaming set of interim results, with pre-tax profits beating analyst’s expectations for a 28% increase year-on-year to £31.7m and underlying revenue up 9% to £254m. Management expects the firm to continue to benefit from its strong position in its niche infrastructure markets, mainly in the UK and US, where high levels of investment are fuelling demand for its products.

Our friends in the City seem to echo management’s positive outlook, projecting a 21% rise in underlying profits for the full year to December, with another 8% improvement pencilled-in for 2017. At current levels Hill & Smith trades on a pricey 19 times forecast earnings for the current year, well above historical levels. I would suggest keen investors wait for the inevitable dip in the share price and buy on weakness to gain better value.

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

Bolting ahead

Thanks to the ubiquity of its products, I reckon Trifast (LSE: TRI) is a great stock for those seeking reliable earnings growth year after year.

The bolt-and-fastening maker’s products can be found in a wide array of applications, from domestic appliances and home electronics right through to cars.

Indeed, the latter segment accounts for a third of group revenues. And with global auto sales surging steadily higher — and Trifast steadily increasing the amount of product ‘loadings’ per unit — I expect profits to continue pounding higher.

This view is shared by the City, and Trifast is expected to record earnings expansion of 6% in both of the years to March 2017 and 2018. I reckon that consequent P/E ratings of 13.5 times and 12.7 times make the manufacturer great value.

Lighting it up

Like Trifast, a healthy car market should underpin sterling results at Carclo (LSE: CAR).

The West Yorkshire business provides lighting units for automobiles, and its Wipac division — which provides product for supercars such as Aston Martin — is performing particularly strongly at present.

But cars aren’t the be-all-and-end-all for Carclo, with the company also providing lighting across a variety of other applications, not to mention plastic products for the medical and electronics industry. And the business has opened new facilities and expanded existing bases across North America, Asia and Europe during the past year to meet future demand.

The number crunchers expect earnings to keep rattling higher at Carclo, the firm is anticipated to enjoy earnings growth of 21% in the periods to March 2017 and 2018. The manufacturer deals on subsequently-cheap P/E ratios of 13 times and 10.8 times for these years.

In the fast lane

It’s impossible not to come across Hill & Smith’s (LSE: HILS) products during the course of the day.

The company manufactures an array of road-related furniture, and the company’s broad range of hi-tech barriers in particular makes it the go-to manufacturer for roadbuilders across the globe. This quality makes Hill & Smith a strong beneficiary of the ‘UK Road Investment Strategy’ to improve transport infrastructure up and down the country.

With Hill & Smith’s other industrial products also flying off the shelves, the City has pencilled-in earnings growth of 7% for 2016 and 12% for 2017. Consequently, a P/E rating of 16.5 times for the current period slips to an attractive 15.2 times for next year.

A defence delight

Defence play Avon Rubber (LSE: AVON) lit up the leaderboards in Wednesday trading following the release of blockbuster results, the firm last 11% higher on the day.

Avon Rubber announced that both revenues and pre-tax profits advanced 5% during October-March, helped by solid mask demand from the US Department of Defense. Indeed, the company received a further 167,000 orders for its M50 model during the period, giving the company what it describes as “a strong forward order book.”

The mask builder is also enjoying a growing pipeline from non-DOD clients in the Americas and the Middle East. And elsewhere, the firm’s Milkrite milk-extraction system is also performing well despite difficulties in the dairy industry.

The City expects earnings at Avon Rubber to dip 5% in the period to September 2017, although an 8% rebound is anticipated for next year. I reckon consequent P/E ratios of 13.7 times and 12.8 times represent great value given the manufacturer’s exceptional revenues outlook.

The post 4 smoking small caps for shrewd investors! Avon Rubber plc, Trifast plc, Carclo plc & Hill & Smith Holdings plc appeared first on The Twelfth Magpie.

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