Communisis (LSE: CMS) is, in my view, one of the markets most underappreciated companies. Over the past five years, the group has moved away from its traditional business of print marketing to become an integrated global marketing business.
As the business has transitioned, earnings have multiplied. For 2017, City analysts are projecting normalised earnings per share of 6.4p, compared to 3.2p for 2012… 100% growth in five years.
However, despite this rapid growth, the market continues to place a low multiple on the shares. At the time of writing, shares in Communisis are trading at a forward P/E of 11. They also support a dividend yield of 4%.
On-track for growth
According to a trading update issued by the firm today, management believes that Communisis is on track to hit City forecasts for the year. The year-end update notes the company “performed well in 2017, with growth in sales and profitability, good free cash flow and a further marked reduction in net debt“. As a result, “the board anticipates that audited results for the year will be in line with expectations.”
During the period, net debt declined to £24.3m from £30.4m, while the accounting deficit related to the group’s defined benefit pension scheme fell to £38m from £55.5m. And it looks as if Communisis’ buoyant trading is set to continue for the next few years, revealing today that it has expanded “facilities in the North East of England to meet increased demand for fast-turnaround campaign fulfilment“, as well as signing a new five-year contract with a major UK bank client.
All in all, Communisis is growing, has a bright outlook for growth, and is generating plenty of cash. To add to the investment case, the shares are also trading at an attractive earnings multiple and offer a market-beating dividend yield. This is why I’d buy the stock in 2018.
Communisis’ peer Huntsworth (LSE: HNT) is also on my radar for 2018. Huntsworth is a marketing firm that specialises in healthcare, but management has made some missteps over the past five years. These issues saw the group plunge into a loss of £56m on writedowns for 2014.
Nevertheless, since 2014, Huntsworth has made steady progress streamlining its operations and analysts expect the group to report a net profit (for the first time since 2014) of £18m this year. Net debt at 30 November 2017 was approximately £44m, equating to less than 1.5x net debt to pro forma EBITDA, and below the £75m borrowing limit agreed by creditors.
Like Communisis, Huntsworth also trades at an attractive valuation considering its growth potential. With adjusted earnings per share growth of just under 15% expected for 2017, the shares look cheap, trading at a forward P/E of 13.2 and support a dividend yield of 2.5%.
As the firm continues to reinvest earnings back into its operations (management agreed at least one major acquisition last year), growth should continue. What’s more, now that the company has put its problems behind it, the market might reward the shares with a higher multiple.
Rupert Hargreaves owns no share 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.