When it comes to small-cap stocks, one of the best performers in my own portfolio recently has been concrete-levelling equipment manufacturer Somero Enterprises (LSE: SOM). The price is up another 8% today following a very positive set of interim results. Here, in a nutshell, is why I’d continue buying this cheap UK share.
What’s got the market so excited?
Fantastic trading, that’s what! Revenues from the first half of 2021 came in at $64.4m. That’s an 82% jump from the same period last year.
Much of this rise was attributed to a “very strong and highly active” US market — the firm’s biggest — and customers attempting to make up for lost time last year. Demand for new warehousing due to the huge growth seen in e-commerce following the pandemic was another reason. Elsewhere, three of the company’s five international markets delivered revenue growth.
Naturally, all this has been good news for Somero’s profits. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) jumped 183% to $24.6m. Margins also rose to 38%. On a statutory basis, pre-tax profit rocketed 213% to $23.5m.
An abundance of cash flow was also good news for those holding for income. A stonking 125% hike to the interim payout, to 9 cents per share (6.5p), was announced. Analysts currently have the firm down to return 29 cents (21p) for the whole year. That’s a chunky yield of 4% at the current share price. Even if I end up reinvesting this money in the company, I certainly won’t be turning that down!
Can this purple patch continue?
Things definitely look positive. Following today’s very encouraging numbers and based on trading momentum going into H2, Somero hiked its full-year guidance. It’s now predicting record revenues of roughly $120m for the whole of 2021. A target of £42m for adjusted earnings has also been targeted.
As good as these numbers are, however, it’s the long-term prospects of Somero that I’m more interested in. On this front, I remain bullish given ongoing product development/launches, a growing workforce and expansion in markets like Australia. In fact, the firm is looking to begin increasing operational capacity by 35% towards the end of the year.
Still a buy
Somero traded on just 14 times earnings before the market opened. That’s a steal, in my (probably biased) opinion, especially as it consistently generates great margins and returns on capital. This cheap UK share is also a leader in specialised niche, giving it something of an economic moat.
However, this is not to say that there won’t be headwinds ahead. Trading clearly has the potential to be disrupted by ongoing issues with supply chains. Then again, it’s getting increasingly difficult to find a company/stock that won’t be affected by this issue. On a positive note, SOM did say today that it had “robust plans in place” to tackle this problem if it continues.
Aside from this, one also needs to remember that construction is a cyclical industry. So, there’s certainly potential for the shares to jettison gains made over the last year (+150%) if the global recovery slows.
Again, however, I think Somero should be able to take any strain in its stride. Management expects the company to boast $36m in net cash at the end of the year. That’s a sufficient buffer for me to feel the risk/reward trade-off for this cheap UK share is still in my favour.