This small-cap stock is exploding today. Here’s why

Up 12% at the time of writing, Paul Summers remains bullish on this small-cap stock’s prospects and explains why he’d buy more today.

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I’ve banged the drum for small-cap stock Somero Enterprises (LSE: SOM) many times over the last couple of years. Having climbed over 12% in early trading, I’m going to do the same thing today.

What’s happened?

This morning’s stonking gain is the result of yet another positive update from the laser-guided equipment manufacturer.  

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Thanks to “stronger than anticipated trading” across the pond over the last six months, Somero now expects to beat its previous guidance on full-year revenue and earnings. The company had been expecting the former to come in around $100m and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to hit $31m. Importantly, this previous guidance was only given in May.

So, business is booming?

Today, Somero predicted that revenue would now hit $110m and adjusted EBITDA would be around $35m. It also expects its net cash position to rise above $33m. 

Positively, recent performance hasn’t been restricted to Somero’s main market. Elsewhere in today’s update, the small-cap stock stated that its operations in Europe and Australia had also made “meaningful contributions to growth“.

It sounds like there’s more to come too. Having enjoyed a seriously good last couple of months, it said today that trading momentum had continued into H2. With the US playing catch-up thanks to the pandemic, the AIM-listed company added that project backlogs still extend into next year. The growing need for warehouses and flat-as-a-pancake concrete floors thanks to the explosion in online shopping was also highlighted.

Would I still buy this small-cap stock today?

I think I would still buy it. There are a few reasons, in addition to the positive outlook mentioned above.

First, the valuation is still pretty tempting. While the cyclical nature of the construction industry will always be unattractive to some in the market, a forecast P/E of 15 before markets opened this morning looked very reasonable. Let’s not forget that Somero scores well on an enviable amount of ‘quality’ metrics for a small-cap stock. These include stonkingly high returns on capital and operating margins.

Second, Somero has a history of rapidly increasing its dividends. Sure, there will be the odd wobble along the way, such as last year. However, I think investors can be confident that they’ll continue receiving bumper payouts for some time to come. Although a growth investor by heart, I certainly won’t turn this income down. Since reinvested dividends contribute meaningfully to long-term returns, I’ll simply be throwing the money back at the company. 

Third, Somero isn’t resting on its laurels. The Fort Myers-based business is busy developing its pipeline of new products with the aim of expanding its market. Encouragingly, some of these are due for release in H2. I suspect there could be more positive news on this when interim numbers are confirmed in September. 

So, there are no risks?

Yet there are definitely still risks. A resurgence of Covid-19 could see construction projects delayed again. Should this happen, Somero’s status as a small-cap stock could prove a double-whammy. After all, the share prices of minnows can be very volatile in times of trouble. 

Nevertheless, I’m very encouraged by today’s news. As long as I can sit on my hands through inevitable setbacks, I continue to think this company will generate a fine return for my portfolio.

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Paul Summers owns shares in 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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