When it comes to cheap shares, I like the look of equipment rental specialist VP (LSE: VP). The company released its full-year results report today, showing revenue and earnings down by single-digit percentages.
However, the FTSE SmallCap company has a long record of annual growth in revenue, earnings, cash flow and shareholder dividends. And the stock has been recovering from the recent crash in the markets.
This cheap share’s record is outstanding
Normally, VP sports a decent yield. But the directors have deferred the decision about paying a full-year dividend pending clarity on our emergence from lockdowns. For context, last year the firm earned 97% of its operating profit from UK operations with the rest coming from abroad.
Chairman Jeremy Pilkington said in the report the figures for the year to 31 March are “satisfactory.” He referred to “modest” gains in margin and profit before tax. And the performance through the year came against a “highly uncertain” economic backdrop, which included the Brexit process and the general election of 2019.
And I agree the performance looks steady. VP has been a good bet for investors. Ten years ago, the shares stood at 177p. Today, they change hands for about 800p, even after dropping back during the coronavirus crisis. That’s a serious capital gain if you held over the decade, with generous income from the dividend on top.
To me, gains like that are one of the main reasons for entertaining small-cap shares. Almost all the way over the past decade you could have justified buying shares in VP on valuation grounds, or as a dividend-led income play. Just like you might select a FTSE 100 company for its income. But how many FTSE 100 income investments go on to deliver capital gains on the scale of what VP has achieved? Not many.
Recovery well under way
Chief executive Neil Stothard explained in the report the company kept open “many” of its operating locations to support critical sectors through the lockdown. However, the directors closed some sites and furloughed around half the UK employees. But things are improving and the company has reopened outlets with employees coming off furlough “as demand has recovered.”
The senior management team has taken a 20% haircut in salary until the end of June. And many staff are working a four-day week until demand builds up to pre-Covid levels. Looking ahead, Stothard expects “a slow, incremental recovery over the coming months.”
And I think that anticipated recovery in operations is the investment opportunity now. This is a solid business with growth potential and a long record of effective execution. However, the stock is still more than 25% down from its level in February, before the coronavirus crisis.
I reckon there’s a decent chance that the VP business will continue to expand over the next decade, just as it did over the previous one. So I see the current situation as a decent-looking entry point for a long-term hold.
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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.