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Why I’d buy this resilient and growing small-cap stock right now

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Today’s full-year results report from small-cap stock Mission (LSE: TMG) shows how the pandemic affected the business. Revenue fell by 24% in 2020 compared to the prior year. And earnings per share plummeted by 89% — ouch!

Why I’d buy this small-cap stock

However, City analysts expect the marketing communications and advertising provider to bounce back. Earnings in 2021 should be almost at the level achieved in 2019. And the share price has put in a strong recovery from the coronavirus lows of last spring. At 82p, it’s back to 2019 levels already.

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But 2020 wasn’t a complete operational washout. The company managed to reduce its bank borrowings from £4.9m to £1.2m because of “cash conservation measures”. Trading began to recover in the second half of the year. And that enabled the positive but reduced full-year profit outcome after H1 losses.

The company said client retention was “strong” and more than 50% of the revenue came from long-standing customers. The year saw a resilient performance from clients in the healthcare and technology sectors despite weaker activity levels elsewhere. But throughout the period, Mission continued to win new clients and assignments. Examples include the launch of chemical company INEOS’s hand sanitiser product and even more ongoing business with Amazon Web Services.

Mission acquired Innovationbubble in the period, which is a psychological insights and behavioural solutions consultancy. It seems both organic and acquisitive growth plans are back on the agenda and the pandemic caused only a temporary hiatus to the company’s progress.

Growth likely ahead

Looking ahead, the directors said trading in the first quarter of 2021 is “on track” with their expectations. And they are “encouraged” by a growing pipeline of new business opportunities. Chairman David Morgan said Mission is now an “even stronger” business than before the coronavirus crisis. And it’s better positioned to make progress with the company’s long-term strategy. 

The current level of the share price puts the forward-looking earnings multiple at just below 12 for 2021. I reckon that’s an undemanding valuation given the growth potential of the business. However, the sector is competitive and it would only take the loss of a few clients to scupper forward earnings predictions.

On top of that, there’s no denying the horrible cyclicality of the sector. Mission demonstrated during the pandemic how quickly its revenue and earnings can evaporate. Luckily there’s been a swift bounce-back this time. But the next downturn may not be as kind to the business.

However, Mission has a record of consistent growth in earnings stretching back at least to 2014. And that performance was only interrupted by the pandemic.  The overall trend of the share price has been generally upwards for the past decade. So the stock tempts me now for the ongoing growth potential of the underlying business. And I’d like to tuck away some of the shares to hold for the long term.

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Kevin Godbold has no position in any share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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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