Looking for cheap growth stocks? Here are three profitable businesses that look undervalued for the earnings growth they’re set to deliver. You can buy their shares today for under £1.
£100m target
AIM-listed Idox (LSE: IDOX) has a market cap of £269m at a share price of 66.5p. This supplier of software solutions and services to the UK public sector (and also to the wider corporate sector) has recently completed an £18.5m acquisition that will significantly expand its presence in the health and social care market.
The company is targetting £100m revenue “in the short-to-medium term” and I believe it could hit this target in 12-18 months. Based on an improving pre-tax profit margin and standard tax rate, I think we could see earnings per share (EPS) approaching 5p — 20% ahead of 2016’s 4.11p — for which growth you’re currently paying a price-to-earnings (P/E) multiple of 13.5.
Idox’s strategy is to supplement organic growth with acquisitions and, while acquisitions are never without risk, such a strategy can provide lucrative returns for investors if pursued in a disciplined manner. I believe the potential growth here is appealing enough to rate the shares a ‘buy’.
Double benefit
Severfield (LSE: SFR) is a main market company — listed in the FTSE SmallCap index — and has a market cap of £241m at a share price of 81p. It’s the largest structural steel business in the UK, supplying office buildings (such as the Shard), stadia (such as Liverpool’s Anfield), tunnels, bridges and so on.
European firms have become less competitive in bidding for UK work, thanks to the slump in sterling, and Severfield is enjoying the double benefit of seeing “more opportunities” in Europe.
For its financial year ending 31 March, I’m expecting the company to post EPS of a little over 5p — 37% ahead of last year’s 3.67p — for which growth you’re currently paying a P/E multiple of 16. This is another stock that looks very buyable to me.
Packing a punch
Macfarlane (LSE: MACF) is a constituent of the FTSE Fledgling index (main market companies that are too small to be included in the FTSE All-Share). Its market cap is £85m at a share price of 62p.
The Glasgow-based firm is engaged in designing, manufacturing and distributing protective packaging materials in the UK, as well as adhesive and resealable labels for fast-moving-consumer-goods customers in the UK, Europe and the US.
Like Idox, Macfarlane is pursuing a strategy to supplement organic growth with acquisitions, further cementing its packaging materials UK distribution leadership in what is a highly fragmented market. I’m expecting EPS of 5.5p (26% ahead of the previous year’s 4.37p) when the company posts its 2016 results a week on Thursday. For this growth you’re currently paying a P/E multiple of just 11.3. As you might have guessed, I rate this stock a ‘buy’ too.
