Revenue up 5%: is this small-cap company a stock to buy?

Consistent progress from the business behind this stock makes it look like one to consider now as a buy for the long term.

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I reckon there’s a bright future for FTSE SmallCap stock Porvair (LSE: PRV), but is it one to buy now? Well, it’s certainly on my focus list.

I like the firm’s long-term record of steady operational progress. Over the past 10 years, revenue’s notched up a compound annual growth rate (CAGR) of 6% and adjusted earnings per share of 10%.

They’re not the kind of exciting numbers that raise pulses to dangerous levels. However, the financial and trading record shows consistent improvement. In short, the stock looks a decent candidate to consider for a long-term investment.

Porvair operates in the specialist filtration, laboratory and environmental technology sectors. The directors aim to focus on markets with long-term growth potential. On top of that, the company seeks to serve areas where “product use is mandated and replacement demand is regular”.

Well-financed organic and acquisitive growth

I reckon that approach might be one of the key drivers behind the firm’s consistent growth and trading over the past few years.

Porvair’s operating segments are Aerospace & Industrial, Laboratory and Metal Melt Quality, all of which the directors insist have “clear” long-term growth drivers. Meanwhile, the progress of the overall business has been both organic and via acquisitions. So I’d expect more of the same ahead.

Today’s (1 July) interim results statement shows year-on-year revenue grew by 5% in the six months to 31 May. Although at constant currency rates, the rise was 8%.

However, currency adjusted underlying sales revenue actually fell by 3%. The overall rise occured because of the effects of prior acquisitions.

That weakness in like-for-like performance was caused by softening in the industrial and laboratory consumables markets. There was a trend among customers of reducing inventory levels “and more normal lead times through 2023 and 2024”.

De-stocking combined with adverse currency exchange rates to cause the firm’s profit margins to drop a bit too.

The situation demonstrates that Porvair’s operations are sensitive to general economic and cyclical influences. So the growth trajectory here’s unlikely to ever be straight up. As with most businesses, we could see volatility for operations and the stock over the coming years.

It’s one of the risks here and has the potential to cause a losing investment for shareholders. The directors said today that Inconsistency in trading patterns across the Group is not unusual”.

Anticipating a strengthening second half

Nevertheless, the company expects underlying market growth to return during the second half of the trading year. On top of that, the long-term growth drivers of Porvair’s operating sectors are robust. And chief executive Ben Stocks said the business looks set to move into 2025 “in good shape”.

City analysts anticipate mid-single-digit percentage advances for earnings and the dividend next year. Set against those estimates and with the share price near 668p, the forward-looking earnings multiple is just below 17. And the anticipated dividend yield’s a little under 1%.

That’s not the cheapest valuation in the world. But the balance sheet looks strong and multi-year trading performance has been consistent overall. I’d dive in with deeper research, then watch this one with a view to considering the stock on market dips and down-days.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Porvair Plc. 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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