Volution Group (LSE: FAN) flies under the radar of most investors, but that doesn’t mean you should ignore the company. The business, which is a supplier of ventilation products to the residential and commercial construction market in the UK and Europe, is expected to report a pre-tax profit of £34.4m for the fiscal year ending 31 August, up around 100% from the pre-tax figure of £18.4m reported for fiscal 2016. Earnings per share are expected to grow 8% year-on-year to 13.6p.
A boring business but worth the money
Volution might seem like a boring business, but such businesses tend to produce the best results, thanks to specialisation and a lack of competition. Volution is no different. Over the past five years, the company’s revenues have grown at a compound annual rate of around 12%, and the operating margin has averaged around 10% for the period. Also, very little in the way of capital spending is required for the business, so free cash flow is robust. For fiscal 2016 free cash flow per share was 12.4p.
This slow and steady growth is worth paying for. While the firm might not have the allure of some high-growth tech stocks, it knows its market well, and steady growth with a healthy cash flow is the name of the game.
The shares currently trade at a forward P/E of 14.1, which might look expensive, but on other metrics the group is cheap. Specifically, on a price-to-free cash flow basis, shares in the company trade at a multiple of 12.6, a 35% discount to the wider sector average of 19.4. As Volution’s growth continues, this valuation gap should narrow as the market realises the company’s potential.
Shares in Stobart Group (LSE: STOB) have added 89% excluding dividends over the past 12 months and even after this explosive rally they still look cheap compared to projected earnings growth rates. City analysts have pencilled-in earnings per share growth of 76% for the fiscal year ending 28 February 2018 after the company sold off its Eddie Stobart Logistics business during April.
Now the management has divested this asset, the company can concentrate on the management of London Southend airport and the group’s biomass business. While the shares are trading at an estimated forward P/E of 21.1, considering the group’s rapid earnings growth, they trade at a PEG ratio of 0.5. A ratio of less than one indicates that shares offer growth at a reasonable price.
Like Volution, Stobart is a cash cow. According to a recent update, management believes that between the end of March and June this year, the company generated £160m in cash to support its dividend and invest across the business. A significant portion of this was produced from the Stobart Logistics listing, and the sale and leaseback of eight aircraft for a total of £46.4m also helped. The realisation of value from these assets gives the group firepower to accelerate growth in other parts of the business, and that should underpin further earnings expansion.
Hidden growth champions
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.