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Do Benchmark Holdings PLC And Servoca Plc Deserve A Buy Rating?

Even Neil Woodford doesn’t get every stock pick right: Benchmark Holdings (LSE: BMK), in which Mr Woodford’s fund has a 14.5% stake, issued a major profit warning this morning, sending the food science firm’s shares down by 28%, to 78p, at the time of writing.

It was a different story at staffing specialist Servoca (LSE: SVCA), whose shares rose strongly this morning after the firm issued a short but sweet trading statement, informing the City that results for the first half of this year are expected to be “ahead of internal expectations”.

Both companies have attractions, but are they a buy?

Benchmark Holdings

Mr Woodford’s 14.5% stake in Benchmark only translates into 0.6% of the Woodford Equity Income Fund, so today’s fall won’t have a major effect on the fund’s returns.

However, Benchmark’s private investors may be suffering: Benchmark shares are down by 24% so far this year, and are now quite close to the 73p level at which they entered trading in December 2013, when the firm was floated on AIM.

So what’s gone wrong? On the face of it, Benchmark has done well. Sales have grown from £12.9m in 2012 to £35.4m in 2014, and were expected to hit £63.9m this year, generating a forecast profit of £8.4m.

Unfortunately, a substantial proportion of the firm’s revenue and profits appear to depend on a single product, Salmosan, which is a sea lice treatment used on fish farms.

Salmosan is a mature product without patent protection, and the firm has been losing sales to cheaper generic competitors more quickly than expected. As a result, full-year revenue and profits are now expected to be “significantly below market expectations”.

Benchmark says that it has regained its market share by signing volume deals with major customers, but these are presumably at lower rates than previously, suggesting profit margins will now be lower.

Before today’s fall, Benchmark shares traded on around 25 times current year forecast earnings. I suspect that once earnings forecasts have been revised downwards, that multiple will be maintained at the new share price.

Benchmark has several new products in the pipeline, and could have exciting long-term potential. However, I feel forward visibility of earnings is poor and further disappointments are possible, so I wouldn’t be a buyer at the current price.

Servoca

Servoca provides specialist staffing and recruitment services to the education, healthcare and criminal justice sectors.

The firm reported revenue of £49m last year, on which adjusted earnings per share were 1.08p. At the current share price of around 24p, this places the shares on a trailing P/E of 21, but today’s trading statement makes it clear that the firm is on course to deliver substantial growth this year, suggesting that full-year earnings are likely to be higher than current forecasts of 1.3p per share.

In my opinion, these forecasts could rise by around 10%, following today’s update, giving full-year earnings per share of around 1.45p, or a forecast P/E of around 16.

Encouragingly, Servoca’s chief executive Andy Church was a heavy buyer of shares earlier this year, when he purchased a further 735,616 shares, taking his total stake in Servoca to 5.49%.

Servoca looks like an interesting growth opportunity, in my view, and could be a promising buy.

However, I believe that another small cap stock, which has been billed by the Motley Fool's market-beating analysts as "1 Small-Cap Stock Flying 'Under The Radar'", could be a more compelling buy.

The company concerned has a strong track record of growth and the Fool's experts believe the shares could offer upside potential of up to 38%.

This report is FREE and without obligation.

To learn the name of the company and see why the Fool's experts believe it's a buy, click here now.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.