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Forget Purplebricks! I’d rather invest in this profitable and growing small-cap

How frustrating it must be for shareholders seeing the back-peddling being done by Purplebricks Group from its overseas expansion. But rather than investing in such ‘noisy’, but profitless ‘we’re-going-to-change-the-world-type’ companies, I’d rather go for something with a track record of success and profits.

And Midwich Group (LSE: MIDW) is a good example, despite a lack of progress with the share price since my previous article about the firm in January. The firm operates as a specialist audio and visual (AV) distributor to the trade market in the UK, Ireland, Continental Europe and the Asia Pacific region. I like its strong position in the UK and the acquisitive and organic growth strategy that is helping the firm expand abroad.

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A strong position in its markets

Midwich distributes stuff for around 400 “vendors”, which includes some “blue-chip” organisations. Think of things such as large format displays, projectors, digital signage and professional audio. In some cases, the firm is “the sole or largest in-country distributor for a number of its vendors in their respective product sets.”

The directors reckon the company’s cosy position in its markets has arisen because of its technical expertise, ”extensive” product knowledge and “strong” customer service. Such things haven’t occurred overnight but have been “built up over a number of years.” Meanwhile, the company serves around 17,000 customers, most of which are “professional AV integrators and IT resellers” serving the corporate, education, retail, residential and hospitality sectors. 

In today’s trading statement, the company said that in the six months to 30 June it traded well, with revenue growing both organically and via contributions from recent acquisitions. The firm saw revenue growth from all its trading geographies but Continental Europe and the Asia Pacific region performed “particularly well.”  Overall gross profit margins were up a bit too.

Ongoing geographic expansion

Midwich acquired four businesses in the period, which have given the firm a toehold in Italy, Switzerland and Norway as well as “strengthening” its capabilities in the audio and lighting segmentsMeanwhile, cash generation in the first half came in “slightly ahead” of the directors’ expectations. 

City analysts following the firm have pencilled in earnings increases for the current year to December and for 2020 averaging around 12% per year, which strikes me as a decent rate of growth. Meanwhile, with the share price close to 565p as I write, the forward-looking price-to-earnings ratio for 2020 hovers between 16 and 17, and the anticipated dividend yield is about 3%.

I admit that this isn’t a bargain valuation, but the firm is profitable, growing its earnings and has a vibrant strategy for further expansion. We’ll get more colour regarding trading in the first six months of the year in the half-year report, which is due on 10 September. With a bit of luck, the company will also update its outlook statement at that time.

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Kevin Godbold has no position in any 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.

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