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A hot growth stock I’d buy right now over Interserve plc

Full-year results from software provider Dotdigital Group (LSE: DOTD) delighted the market this morning and the share price is almost 8% higher as I write. So is the firm a hot growth stock as described in this article’s headline? The directors think so, describing the trading period as “a successful, dynamic year, driven by exciting global expansion.” Indeed, earnings have been rising by double-digit percentages for several years, and the shares have risen by almost 900% since early 2012.

Operational momentum

The company’s business of providing managed services to digital marketing professionals through its dotmailer email marketing automation platform has produced some impressive figures. Revenue is 19% higher than a year ago, earnings per share elevated 32% and the firm’s net cash position increased by 18% to a little over £20m. I always find it comforting when a company has no borrowings on its balance sheet, as is the case here. The directors indicated their optimism for the future by pushing up the dividend by almost 28%.

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Operational momentum is pacey, and key performance indicators include average revenue per user lifting 24% to £715 and overall volume of messages sent increasing by 38% to £11.9bn. More than 550 new clients signed up to Dotdigital’s service during the period, including well-known names such as BetFred, CNBC, Fannie May, Jack Wills, Superdry and The Premier League.

International expansion

The company has its sights set on international expansion and grew its revenue outside the UK by 48% during the year, which strikes me as a stunning rate of growth. If the firm can sustain that kind of performance, the growth outlook is exciting. Chief executive Milan Patel seems confident and said in the report: “The market outlook remains strong which puts us in a good position to capitalise on our strategy and the Board remains confident about achieving our ambitious growth plans.”

At today’s share price, around 78.5p, the forward price-to-earnings (P/E) rating runs close to 29 for the year to June 2018, which isn’t cheap, but could end up being reasonable for a firm with such robust growth prospects. I’d rather take my chances with a growing business such as Dotdigital’s than on fallen support services company Interserve (LSE: IRV), which is starting to look insecure.

Discussions with lenders

According to news reports on Monday, Interserve revealed that it is “engaged in constructive and ongoing discussions with its lenders,” which is enough to send me scurrying to the hills. The firm’s share price plummeted in September after it warned that profits would be “significantly below” previous expectations following grim trading in July and August. The firm is engaged in extracting itself from its energy-from-waste contracts but now thinks the final costs of that tactic will be much higher than the £160m expected initially.

Interserve has proved the weaknesses of its business model. Multi-discipline contracting and outsourcing is a tough way to earn a living. Meanwhile, Dotdigital’s software operation is growing earnings fast, so the choice between the two operations is stark, and I’d rather go with the winning team. 

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Kevin Godbold has no position in any of the 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.