While the outlook for the UK stock market may be uncertain in the short run, its long-term potential remains high. Certainly, there are political risks resulting from the general election and Brexit which could cause some share prices to come under pressure. However, in the long run there could still be strong growth stories on offer, while valuations may have factored in potential short-term challenges. With that in mind, these two smaller companies could be worth a closer look.
Improving performance
Reporting on Thursday was independent video games creator Frontier Developments (LSE: FDEV). The company reported an improved trading performance for the year to 31 May, with it expecting revenue which is 75% higher than the previous year. Sales are also expected to be ahead of previous guidance, which is a key reason why the company’s share price surged 6% higher following the update.
The company’s operating margin is expected to be towards the top end of the 15-20% guidance range. It anticipates operating profit to be at least £7.2m, which is a 500% increase on the prior year. The step-up in financial performance is due mostly to the launch of the company’s second game franchise, which marks the successful transition to multi-franchise self-publishing. With a cash balance of £12.6m and a sound business model, there could be further growth ahead.
In the near term, the company’s first game franchise could provide additional growth potential. It is set to be released on an additional console, PlayStation 4, later this month. This could act as a further positive catalyst on the company’s financial performance, with the scope for further franchises over the long run. As such, now could be the right time to consider purchasing the stock for the long term in what remains a fast-growing industry.
Low valuation
Also offering long-term growth potential is toys, giftware and games designer and distributor, Character Group (LSE: CCT). It has been able to grow its bottom line at a double-digit rate in each of the last three financial years, with more growth forecast over the next two years. Although the company’s growth rate is set to fall to 5% this year and 7% next year, its valuation suggests that its share price could move higher.
The company trades on a price-to-earnings (P/E) ratio of just 10.4. This suggests an upward re-rating could be on the cards even after a 272% rise in its share price over the last five years. One possible catalyst to make this happen could be the company’s dividend appeal. It currently yields 3.3% from a dividend which is covered 2.9 times by profit.
This suggests that shareholder payouts could grow at a faster pace than profit over the medium term, while leaving the business with sufficient capital to reinvest for future growth. As such, ahead of a period of potentially higher inflation, Character Group could be a worthwhile buy.
