Small-cap growth stocks offer investors the potential for outsized returns. Judges Scientific (LSE: JDG), which released impressive annual results today, is one such stock I’d happily buy. And there’s another small-cap I’ll discuss, which still looks very buyable to me despite its share price having more than doubled in less than a year.
Attractive proposition
Judges Scientific owns 16 scientific instrument businesses, which are primarily UK-based but serve global niche markets, with long-term growth fundamentals. The group is listed on AIM and its shares are trading 4.6% higher at 2,270p, as I’m writing, on the back of today’s record results. Its market capitalisation is just under £140m.
It reported a 24.6% increase in revenue to £71.4m, including 17.7% organic growth, and a 55.5% rise in underlying earnings per share (EPS) to 131.9p. At the current share price, the price-to-earnings (P/E) ratio is 17.2. The performance was helped by “very favourable foreign exchange rates” but even so, the P/E looks cheap.
The company boasts a strong order book and has £10.7m cash on the balance sheet to help it pursue selective acquisitions, which are an integral part of its growth strategy. The businesses within the group can experience some short-term variability in performance but the long-term growth drivers make Judges an attractive proposition in my view.
Special situation
Although it counts familiar blue-chip names among its customers, packaging machinery specialist Mpac (LSE: MPAC) will be unknown to most readers. Until recently, this AIM-listed firm was called Molins. The change followed the disposal of the group’s tobacco machinery division and transfer of the Molins name.
I first tipped the company as a ‘special situation’ in June last year when the shares were trading at 101.5p. I put fair value at between 175p — based on pro forma net asset value (NAV) of £35.4m — and 197p. That latter figure was based on £51m forecast sales for the remaining business, valued at the same 0.78 times sales multiple at which the disposed-of business was sold. I upped my NAV estimate to £44.6m (221p a share) in November and suggested “the value on offer here could attract wider attention when the company releases its annual results (with a clean balance sheet) in early 2018.”
Those results showed revenue a little above forecast at £53.4m, giving a fair value of 207p a share on my 0.78 sales multiple, and NAV a little below my estimate at £42.8m, giving 212p a share. The shares are currently trading at 210p and the market cap is £42m.
Still value on offer?
The special situation has played out nicely but looking at the stock afresh, there still appears to be value on offer. According to Reuters, the consensus among City analysts is for EPS of 10.15p for the current year, followed by a 42% increase to 14.4p next year. This gives a P/E of 20.7, falling to 14.6, and a price-to-earnings growth (PEG) ratio of 0.35, which is well to the value side of the PEG fair value marker of one.
The company has net cash of £29.4m, a surplus of £17.6m on its UK pension scheme and deficit of £6.2m on its US one. However, there’s some risk due to the size of the gross pension assets and liabilities (both over £400m at the last reckoning), which potential investors should weigh up.
