Quality…at a price

I can’t pretend to understand the science behind what small-cap Bioventix (LSE: BVXP) does in much detail, apart from saying that it develops and supplies antibodies for use in the diagnosis of conditions such as heart disease, cancer and drug abuse. What I can tell you is that it’s a first-class business, generating absolutely huge operating margins and returns on capital employed — the latter being just the sort of thing one of the UK’s most successful fund managers looks for. Based on its half-year report issued at the end of March, I shouldn’t think there’ll be much to worry about when the Farnham-based firm reveals its latest full-year numbers on 21 October.

Back in March, the company revealed 24% rises in both revenue and pre-tax profit (to £4.4m and £3.2m respectively). Its balance sheet remained strong with a closing cash balance of £5.5m. While far from being an income play, an interim dividend of 30p per share was also declared — 20% higher than at this time last year; not bad for an organisation with just 15 employees.  

Pretty much the only issue with Bioventix at the current time is the price of its stock. At a little less than 33 times earnings, the market is already expecting a lot. Should markets head southwards over the next month or so as a result of Brexit jitters, I’ll be in the queue to pick up a slice of this quality small-cap. 

Buy the dip?

Another growth stock that’s likely to be flying well under the radars of most retail investors is audio-visual specialist Midwich (LSE: MIDW). Its services include providing huge LED screens for a variety of clients and events. 

Trading over the first half of 2019 was encouraging, with this month’s interim results revealing a 19.2% rise in revenue to £314.8m and a 6.2% rise in adjusted pre-tax profit to £13.7m. 

In addition to this, there was a 5.4% increase to the interim dividend and news that acquisitions in the previous financial year were bedding in nicely. Indeed, these purchases, combined with three others over the first half of 2019, have helped to increase gross margin and open new markets for the company. 

In terms of share price performance, however, Midwich hasn’t exactly set the market on fire. Indeed, it’s been rather volatile over 2019, rising as high as 633p back in April only to fall back to the 500p mark over the summer.

That said, this company’s value is still well over double what it was five years ago. What’s more, the recent dip in form leaves the shares looking reasonably valued at 16 times earnings, especially when it’s considered that Midwich achieves consistently great returns on capital and is expected to yield 3.1% in the current year (with the payout covered twice by profit). The fact that it has operations in Europe and Asia Pacific as well as across the UK and Ireland should give it some degree of protection from any Brexit fallout. 

Again, like Bioventix, I’ll be sorely tempted to open a position if Midwich drops a bit more over the next few weeks/months. It’s on the watchlist for now.

The post 2 secret growth stocks I think are worth adding to your watchlist appeared first on The Twelfth Magpie.

More reading

• Down 43% with a 9% dividend yield – should I buy this stock?

Paul Summers 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.

While in the near term they may be correct, in the long run, the stock’s valuation suggests that it may offer excellent value for money. At a time when a number of shares, including one stock that released results on Tuesday, appear overvalued, ITV’s share price could have long-term investment potential.

High price

An example of a stock which may be overvalued at the present time is Midwich (LSE: MIDW). The specialist audio visual distributor reported positive interim results on Tuesday which showed a rise in revenue of 25%. Adjusted earnings increased by 23% on a per share basis to 12.09p, with the company’s overall performance being strong. It was able to generate double-digit revenue and profit growth in all territories, while investment in new geographies and the development of specialist broadcast, lighting and audio segments boosted its financial performance.

Looking ahead, the company is expected to report a rise in earnings of 15% in the current year, followed by further growth of 8% next year. While this is an upbeat outlook which suggests that the stock is performing well, the investment potential of the company appears to be limited. It trades on a price-to-earnings (P/E) ratio of 27, which indicates that it lacks a margin of safety at the present time.

Low valuation

In contrast, the ITV share price appears to be dirt-cheap after its recent decline. It has a P/E ratio of around 11, which indicates that it offers scope to trade at a much higher level than at present. In the short run, the company’s financial outlook may appear to be downbeat, with earnings set to decline by over 3% in the course of the next two years. But with it having a dominant position in the television advertising market, the long-term growth prospects for the stock remain bright.

As a cyclical company, periods of disappointing financial performance are not unusual for ITV. In fact, they provide long-term investors with the opportunity to buy the stock at a low price, with improving earnings performance often being a good time to sell after making a profit.

While it may take a number of years for the stock to return to previous highs, it seems to have the right strategy and a sound management team through which to deliver improved performance. As such, and at a time when a number of FTSE 100 shares are trading on high valuations, now could be the right time to buy the company for the long run. While it may disappoint in the near term, its potential to deliver high total returns in the coming years still seems to be significant.

The post Thinking of buying FTSE 100 member ITV’s share price after 10%+ fall? Read this first appeared first on The Twelfth Magpie.

More reading

• £500 gets 617 shares in one of the top FTSE income stocks to buy!
• Here’s how to invest £3,600 in UK shares to target a 7% dividend yield
• Should I buy ITV shares for my ISA ahead of the World Cup?
• With dividend yields averaging above 7%, are these 2 UK shares worth considering?

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.

Over the past 12 months, shares in the company have smashed the broader market, returning 146% as the business has gone from strength to strength. And today the firm revealed that this growth momentum has continued with management now expecting to report revenue for 2017 of approximately £470m, representing growth of around 28% year-on-year. As well as growing revenues by nearly a third, the group has managed to do so while “continuing to improve gross margins in line with the board’s expectations.“

Beating expectations 

As a result of this performance, the group “now anticipates reporting adjusted profit before tax for 2017 comfortably ahead of its previous expectations.” 

City analysts had been expecting earnings per share growth of 78% year-on-year before today’s news. It now looks as if this target will be exceeded, which means that the shares, trading at a forward P/E of 22.5 (based on old forecasts) look exceptionally cheap. Specifically, Midwich’s PEG ratio is around 0.3. A PEG ratio of less than one signals that the shares offer growth at a reasonable price. 

What’s more, it looks as if Midwich’s growth will continue into 2018. The company made a number of acquisitions in 2017 to help this, the full benefit of which should be seen this year. MD Stephen Fenby noted in today’s press release that “through 2018, management will continue to explore cross-selling opportunities in the current portfolio while also evaluating the healthy pipeline of potential acquisitions.” So it looks as if there are more deals on the horizon. 

Analysts have earnings per share growth of 14% pencilled in for 2018, but this could turn out to be a conservative estimate if Midwich continues to expand at its current rate. 

Alongside Midwich, I also like the look of Rolls-Royce Holding (LSE: RR). 

Growth target by 2020

Shares in Rolls have struggled over the past year as the company has got stuck into its turnaround plan. On the face of it, the stock isn’t that cheap, which could put investors off. However, this is a growth story that will take time to unfold. 

Rolls is currently trading at a forward P/E of 27.2, which is painfully expensive when you take into account the group’s stagnating earnings. Nonetheless, management believes that by 2020, the firm will be producing £1bn of cash flow, and it’s here that the value is to be found. 

Rolls’ free cash flow last peaked at £781m in 2013 when the shares traded as high as 1,185p, a valuation of just under 26 times free cash flow per share. Cash flow of £1bn works out at 54p per share, which translates into a share price of 1,404 based on the previous multiple. Based on this target, investors could see a return of 64% over the next three years. 

That said, management has cautioned that it won’t be plain sailing to this target, that’s why I believe Midwich would make a perfect partner for Rolls in your portfolio if you’re looking for a growth duo. 

The post Why I’d buy this small-cap growth stock alongside Rolls-Royce Holding plc appeared first on The Twelfth Magpie.

More reading

• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• Here’s how much I think Rolls-Royce shares will be worth by the end of 2027
• Could small modular reactors take Rolls-Royce shares to the next level?
• Is now the perfect time to buy Rolls-Royce, Babcock and BAE System shares?
• The SpaceX frenzy is over – is it time to look at Rolls-Royce shares again?

Rupert Hargreaves owns no share 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.

Shares in Echo Energy (LSE: ECHO) have been suspended from trading today after the company announced that it was in the process of negotiating a transformational acquisition. 

According to the firm’s press release on the matter, management is currently holding talks over a potential new buy in South America. However, due to the size of the purchase, the transaction would constitute a reverse takeover and as such the company’s shares have been suspended from trading. 

The group’s shares will remain suspended until a new admission document is published and after shareholders have approved the transaction – or the proposed deal is cancelled.

A big deal 

Unfortunately, as of yet, there are no further details on the transaction, but it looks as if this will be a transformational deal for the business. Earlier this month management praised a very active period for company development in the prior weeks and informed shareholders that “we have continued to assess multiple opportunities in the region.”

And unlike the majority of other small oil & gas explorers, Echo is cash rich. The company ended the six-month period to June 30 with £25.5m of cash on the balance sheet after acquiring two exploration blocks in Bolivia. 

Charting a course for success 

Going forward, as with all oil minnows, Echo’s success depends on management’s ability to select the best quality assets and bring production on-stream efficiently and under budget. 

The new management team led by CEO Fiona MacAulay and chairman James Parsons seems highly motivated, and management is certainly not wasting any time expanding the group’s asset base. If the firm continues on this track, I believe that there’s a high chance investors could be well rewarded over the long term. That being said, while Echo could be a multi-bagger, as with all early-stage oil and gas companies, the risks of failure are high. 

A safer buy? 

Echo is a high-risk, high-reward play. If you’re looking for a lower-risk opportunity which still has the potential for outsized gains, the Midwich Group (LSE: MIDW) might be a better buy. 

Midwich is a specialist audio visual, professional video, film, broadcast, lighting and document solutions distributor. A relative newcomer to the public markets, the firm has quickly made a name for itself. Over the past year, the stock is up more than 100%. 

It looks as if these gains could be just the start of the company’s growth. City analysts have pencilled in earnings per share growth of 15% for 2017 and 9% for 2018. If Midwich hits these targets, the company will have more than doubled pre-tax profit in just under two years. 

To help boost growth, management is reinvesting cash generated from operations into acquisitions, a strategy that’s already paying dividends and should continue to yield results. Recent acquisitions have been incorporated into the group with no issues and are already producing results —  a sign that management knows what it’s doing when it comes to deal-making, which bodes well for future expansion plans. 

The post Buying these two stocks now could make you a millionaire retiree 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?

Rupert Hargreaves owns no share 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.

Impressive performance

The company in question is audio-visual and document solutions distributor Midwich (LSE: MIDW). Its trading momentum has continued in the second half of the year, with the company having benefitted from a continued weakness in sterling. All of its divisions have performed well and delivered growth, with its overseas business in particular performing strongly. Furthermore, there has been a better than expected contribution from its most recent acquisition Holdan.

As a result of its improving performance, the company now expects to beat guidance for the full year. It anticipates that revenue for 2016 will be around £370m, which is 18% up on the previous year. Exchange rate movements account for 3% of this growth, which shows that the business is performing well on an underlying basis. Due to this strong top line performance, as well as margins which are in line with expectations, profitability should be comfortably ahead of previous expectations.

A bright future

Of course, Midwich’s performance contrasts with that of sector peer Capita (LSE: CPI). While the former is expected to record a rise in its bottom line of 12% this year, followed by 8% in the following year, the latter is forecast to post a fall in earnings of 6% in the current year. Therefore, it seems as though Midwich could prove to be a strong performer during the course of 2017. And since it trades on a price-to-earnings growth (PEG) ratio of only 1.5, it appears to have significant upside potential as it benefits from a sound strategy and improving business model.

But Capita also has appeal. It’s expected to return to a growing bottom line in 2018, when its earnings are forecast to rise by 4%. Furthermore, it trades on a price-to-earnings (P/E) ratio of only 8.7, which indicates that it offers excellent value for money as well as a wide margin of safety. And with a yield of 6.4% from a dividend which is covered 1.8 times by profit, it remains a very attractive income stock. In fact, its yield beats Midwich’s yield of 4%, which is covered 1.7 times by profit.

As such, both stocks appear to be worthy of purchase at the present time. Midwich looks the more likely to rise in the near term as investor sentiment could improve significantly after today’s positive update. However, Capita has strong long-term growth potential and with its superior size, scale and diversity could prove to be the better performer in the coming years.

The post Is this 20%+ riser a must-have after smashing expectations? 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 owns shares of Capita Group. 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.