This mid-cap has already turned £1,000 into £11,000. Time to buy?

After returning 25% per annum over the past decade, it looks as if this stock still has plenty of room to run.

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Plastic products design and engineering might not sound like the most exciting industry to be involved in, but this business has been highly profitable for mid-cap RPC Group (LSE: RPC)

Over the past 10 years, it has been able to capitalise on the rising demand for innovative plastic products and packaging. It has expanded through a combination of both organic growth and bolt-on acquisitions, which have allowed it to access both new markets and new intellectual property. 

The group has proven itself to be remarkably adept at executing this strategy and over the past five years alone, net profit has risen 10-fold.

Shareholders have been handsomely rewarded following this growth. RPC’s dividend per share has increased from 6p in 2008 to 28p for this year. But dividend growth is only part of the story. Relentless profit growth has also translated into capital gains. Over the past decade, the stock has produced a total return of 24.9% for investors, turning a £1,000 investment into £11,000 today. 

I believe this is just the start of RPC’s growth story. 

Expanding around the world 

Over the past five years, it has been investing heavily to take advantage of rising demand in China. It has also been investing in the production of new recyclable plastics. It is my view that RPC’s position in the industry gives it a unique edge over smaller peers to adapt to the global shift towards more eco-friendly products. 

Despite the company’s efforts, it seems the market is not willing to give it the recognition it deserves. As they flee the stock, investors have sent the shares plunging by 26% over the past 12 months

According to management, these declines are now weighing on growth plans. Chairman Jamie Pike published a statement alongside a pre-AGM trading update this morning and said: “Pressure on the company’s market valuation and differing investor views on the appropriate level of leverage is constraining the group’s ability to pursue some attractive opportunities for growth.

Be greedy when others are fearful

Based on this feedback, management is now looking to de-lever the business and sell off non-core assets. Personally, I believe cleaning up the balance sheet is probably the best course of action for the firm.

Debt does not pose a threat just yet (at the end of 2017 RPC reported a net debt-to-EBITDA ratio of 2), but I would rather the group took action to stabilise the balance sheet before it’s too late. 

Looking at last year’s figures, reducing debt shouldn’t be too much of a struggle. Asset sales will help, and free cash flow for 2017 was £229m, compared to a net debt balance of £1.1bn. The group has already identified some non-core businesses for disposal. 

In my opinion, RPC’s management has already proven to investors over the past 10 years that it can successfully set a strategy and execute it. With this being the case, I’m confident that the group’s self-help strategy will yield the desired results. The enterprise will come out stronger and better placed for growth on the other side. 

Today you can buy into this growth story for just 9.9 times forward earnings, and there’s a 4% dividend yield on offer as well. To quote Warren Buffett, I believe now is the time for investors to be greedy while others are fearful.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended RPC Group. 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.

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