Somero Enterprises has rocketed 25% today! I’d keep buying this bargain UK share

The Somero Enterprises Inc (LSE: SOM) share price is on fire today. Paul Summers thinks there could be more to come.

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Fools who read our Top micro-cap stocks for August article will know that I’m a big fan (and holder) of laser-guided equipment manufacturer Somero Enterprises (LSE: SOM). As such, you’ll understand just how happy I am to see its shares rocketing 25% higher today following the release of its latest set of interim results.

I think there could be more to come.

Why is Somero soaring?

There are a few reasons. First, Somero made $35.3m in revenue in the six months to the end of June. While this may be lower than the $39m made over the same period in 2019, this is actually far better than previously expected.

Investors may be particularly heartened by news that three new products released by Somero over the first half of 2020 (including the SkyScreed 36) collectively generated $1.6m in revenue for the company. 

Pre-tax profit was 29% lower ($7.5m), but this isn’t too bad considering the disruption caused by coronavirus. 

Dividend delight!

The second bit of good news from today’s update is the resumption of dividend payments. Since no management team would be brave enough to restart these unless they had confidence in the business, such a move can only be interpreted as a good thing by holders.

An interim dividend of $0.04 per share was declared. This may be 30% down on the cash distributed last year, but I think this is prudent given the uncertain outlook.

In addition to this, Somero confirmed that it would also pay out the deferred FY19 dividend of $0.207 per share. A share buyback programme will also be kickstarted. 

Stress test survivor

Another reason for Somero’s share price charge is down to encouraging comments from management.

According to CEO Jack Cooney, the coronavirus pandemic “has served as an excellent stress test for the business” and Somero will become a better company as a result. The company also stated that the growth in e-commerce due to Covid-19 restrictions would likely drive demand for new warehouses — exactly what its concrete-levelling products are made for!

In contrast to other businesses, Somero was also able to give some guidance on the full year. Revenue should now come in around $75m. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) will hit roughly $19m.

Still a buy

Aside from all this news, my chief reason for remaining bullish on the shares rests on Somero’s valuation. At just eight times forecast FY20 earnings before markets opened, Somero looks a steal. The investment case becomes even stronger when its stonking operating margins and returns on capital employed are factored in.

At a time when many companies are struggling to stay afloat, Somero’s balance sheet also looks in great shape. It had net cash of $28.9m at the end of June. This financial buffer should mean the company can withstand any further pandemic-related disruption.

And then there are the dividends. If we assume a 30% reduction to the $0.267 per share payout last year, we arrive at $0.187 per share. After today’s price rise, that gives a still-brilliant forecast yield of 5.4%!

Bottom line

Cyclical small-cap stocks won’t be to every investor’s taste. For those willing to buy and hold (and accept a bit of volatility on the way), however, I think Somero could be a great addition to a diversified portfolio. 

Growth, value, and income: it ticks all the boxes.

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 assessed. Consider taking independent financial advice.

Paul Summers owns shares of Somero Enterprises, Inc. The Motley Fool UK has recommended Somero Enterprises, Inc. 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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