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2 cracking growth stocks I’d buy for the long term

£180m market cap Quartix (LSE: QTX) certainly isn’t one of the better known growth stocks on the AIM but I believe the relatively unknown purveyor of commercial fleet vehicle tracking systems is a great share to own for the long term. This is because the founder-led business has high margins, high levels of recurring cash flow, plenty of growth potential and a healthy balance sheet to boot.

The company’s success stems from customers’ demand for its tracking products that save them significant amounts of money by designing more efficient routes for trucks. This lowers the percentage of time a driver is idling, and offers customers real-time location updates that forestall their constantly ringing the office for updates and wasting employee time.

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These benefits have driven the rapid growth of the company’s subscription base, which has grown at a compound annual rate of 24% since 2011 to stand at 88,000 vehicles at year-end. And since Quartix charges customers a monthly fee for using its products, this increasingly large installation base generates significant reliable revenue streams. In 2016 recurring revenue made up £13.8m of the company’s total £23.3m in turnover.

Since these monthly fees make up the majority of sales, the company’s overall profitability is quite impressive. In 2016, operating margins reached 27.8%, which together with little need for huge capital investments and no debt payments, means cash flow is high and growing.

The company’s policy of returning 50% of cash from operations, less tax payments, to shareholders also bodes well for the its long-term potential as an income option. However, since Quartix’s shares are currently very pricey at 26 times trailing earnings, their yield is a relatively miserly 1.7%.

This is a lofty valuation but with a record of double-digit sales and earnings growth, enormous potential in the newly-entered US market and a great business model, I reckon Quartix is one share to own for the long term.

Time for a test drive? 

A more sanely valued, but equally high growth, option is AB Dynamics (LSE: ABDP), which designs and manufactures testing components for the automotive industry. The company’s cutting edge products help the world’s largest car companies test their new vehicles capabilities and ability to meet regulatory standards.

With a reliable stream of new products in development and high-level industry connections, the company has been growing quite nicely recently. From 2012 to 2016 alone, earnings grew 81%. And growth prospects over the next few years are impressive due to the massive expenditure by traditional carmakers and tech firms alike in developing self-driving cars, all of which will require extensive trials both on test tracks and in real-world conditions.

On top of solid growth prospects I also like that the company boasts operating margins that hit 21.9% in the six months to February, a founder who still owns 24.8% of outstanding shares and a healthy balance sheet with £14.8m in net cash. All of these qualities suggest a well-run business that is prepared for any downturns and is primed to reward long-term shareholders. The company’s shares may be slightly expensive at 20 times trailing earnings, but AB Dynamics is still one small-cap I have my eye on.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Quartix. 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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