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Why I’d avoid Versarien plc and buy this superstock instead

Laser-guided equipment manufacturer Somero Enterprises (LSE: SOM) has done it again, delivering robust full-year results today that demonstrate the kind of operational growth that we’ve become used to from the firm.

Revenue lifted 8% during 2017, diluted earnings per share rose 15% and cash flow from operations went up 16%. The directors expressed their confidence in the outlook by pushing up the total ordinary dividend for the year by 40% to 15.5 US cents and by announcing a special dividend of 3.6 US cents – tasty!

Financial strength from a well-defended niche

One of the things I like about the company is its debt-free balance sheet. At the end of the trading year, the firm had $19m of free cash and chief executive Jack Cooney said it is “financially stronger than ever and well positioned to capture growth across our broad global footprint.” The company looks set to achieve its target of $90m revenue in 2018, an increase of around 5% on the figure for 2017, which City analysts think will drive up earnings by around 30%.

The company’s niche in the concrete-levelling equipment business drives its progress.  As well as supplying the equipment to construction firms, Somero also delivers training, education and support to customers in more than 90 countries. The firm’s technology enables its customers to install high-quality horizontal concrete floors “faster, flatter and with fewer people.” Judging by the numbers, I think it enjoys an economic moat in the industry. The company pioneered the Laser Screed market in 1986 and maintains its market-leading position by focusing on research and development to introduce new products with patent-protected proprietary designs and top-notch customer support following initial sales.

At today’s share price around 377p, you can pick up some of the shares on a forward P/E ratio of just under 10 for 2018, and the forward dividend yield sits at 3.2%. There’s bound to be an element of cyclicality in the business, but no sign of trading weakness at the moment. On that basis, I think the valuation looks reasonable. and I’d rather buy the stock than graphene technology-focused Versarien (LSE: VRS).

Great expectations

So far, the firm has yet to generate any profits and there’s no immediate prospect of it doing so, but it does have a good story. In December, the company signed an agreement with a US-headquartered global chemical supplier to “begin collaborating across a number of projects.” Then in January, it signed a collaboration agreement with “a global textiles and apparel manufacturer” to collaborate on the “incorporation of graphene into fabrics and assess its suitability for inclusion in high-performance sportswear.” The firm also signed a Letter of Intent to establish a graphene manufacturing centre in China.

Such agreements suggest the possibility of ‘jam tomorrow’ but leave the firm a long way from the kind of financial performance we are seeing from Somero. Those agreements look like catalysts for the consumption of cash rather than the generation of cash, at least for now. Meanwhile, the market capitalisation sits close to £127m with a lot of clear blue sky below it.

Making a million in the markets

I reckon Somero Enterprise's ongoing financial performance is more likely to deliver for investors than Versarien’s great expectations. But if you are determined to make a fortune in the stock market yourself, I urge you to download a copy of the Motley Fool’s free research report called Your 10-Step Guide To Making A Million In The Markets. You can get it free, right now, by clicking here.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Somero Enterprises, Inc. 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.