I argued back then that the firm had cyclical operations dependent on the fortunes of the industries it served. But I thought that trading should have been “robust in this mature stage of the current macro-economic cycle,” concluding that the firm’s problems were internal and the stock was, therefore, a turnaround proposition.

A turnaround in the making

Indeed, back then, the chief executive pointed to several reasons for the decline in revenues and profits that caused the shares to plunge. Such as a lack of focus on the company’s bread-and-butter small and medium enterprise (SME) customers. On top of that, there had been poor execution of a number of business improvement programmes, including a new IT system, and it all ended up with key products being unavailable in many of the firm’s depots. The top executive went further, explaining there had been a lack of ownership, empowerment and accountability within the business.

I concluded back then that Speedy Hire had been getting the basics of its business wrong, but thought it could “do much, relatively quickly, to put its house in order.”  I owned up that I’d be “surprised” if the directors’ recovery plan didn’t result in the shares rising from where they were. So, let’s check back in to see how the turnaround worked out so far, and what forward prospects look like for Speedy Hire today.

The share price now sits close to 60p, so it has almost doubled over three years, driven by a strong recovery in revenue and earnings. City analysts following the firm expect earnings to advance a further 15% in the current trading year to March 2019, and 15% again the year after that. Meanwhile, if the analysts’ predictions prove to be correct, the dividend will have increased since 2015 by more than 200% by March 2020, which is remarkable, because previously the dividend had been stagnant for years. Based on the figures, it looks like Speedy Hire is set to shine as a dividend-growing investment and the ‘secret’ about the firm’s progress with dividends will soon be out in the open.

Attractive ongoing growth and income

The figures tell us that the turnaround has been successful, and today’s half-year report demonstrates further progress. Continuing revenue rose 6% compared to the equivalent period the year before, and adjusted earnings per share shot up 24%. The directors expressed their confidence in the outlook by pushing up the interim dividend by 20%, which is a big rise, suggesting that the business is now in good health.

The chief executive, Russell Down, said in the report he thinks the results demonstrate the progress made implementing a customer-focused strategy and growing the firm’s SME customer base. He’s “confident” the company will meet full-year expectations. I reckon Speedy Hire has turned itself around and now looks attractive as a dividend and growth proposition, albeit one operating in a cyclical sector.

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Adjusted pre-tax profit for the year rose by 24.4% to £10.8m, while adjusted earnings climbed 29.3% to 11.5p per share. Shareholders were rewarded with a 5% dividend increase, taking the payout for the year to 4.3p per share.

Today’s figures give the stock a trailing P/E of 8.8 with a dividend yield of 4.3%. That seems pretty cheap for a growing business, so is there anything we should watch out for?

A big adjustment

As a shareholder in Harvey Nash I’m quite pleased with today’s figures. But there are a few points worth noting.

The first is that the group’s adjusted figures exclude some big restructuring costs. Management closed a number of offices last year in order to cut costs in less profitable territories, at a cost of £1.8m.

If we accept the group’s definition of non-core and focus only on core activities, then pre-tax profit including one-off costs fell from £8.5m to £7.8m last year. On the same basis, diluted earnings per share fell from 8.7p to 7.8p, giving a P/E of 13.1.

As investors, I believe we need to be wary of companies whose figures are heavily adjusted. But in this case I think the underlying picture is still quite attractive. I expect this restructuring plan to improve the profitability of the group going forward.

City analysts also seem confident of further progress. Earnings are expected to rise by 14% to 13.1p per share this year, putting the stock on a forecast P/E of 7.8 with a prospective yield of 4.7%.

Although I wouldn’t chase a cyclical business like this to a high valuation, I believe the shares remain a buy at this level.

A strong recovery

Equipment rental group Speedy Hire (LSE: SDY) is another cyclical stock that’s performing well on a modest valuation. Since hitting problems in 2016, the business has been turned around and is now delivering significantly higher profits.

During the six months to 30 September, underlying sales rose by 6.9% to £183.2m. Pre-tax profit climbed 11% to £6m, while strong cash generation enabled the group to reduce net debt by 26% to £63.1m.

Analysts expect an adjusted net profit of £18.8m for the year ended 31 March 2018. Adjusted earnings are expected to rise by 53% to 3.7p, putting the stock on a forecast P/E of 14.

Growth expected to continue

This strong momentum is expected to carry on this year. Forecasts for 2018/19 suggest earnings will climb 22% to 4.6p per share, putting the stock on a modest forecast P/E of 11.5. Alongside this, the group’s improved cash generation is expected to support a dividend of 1.72p per share, giving the stock a forecast yield of 3.3%.

Like Harvey Nash, Speedy Hire is exposed to cyclical risks. A slowdown in the construction and infrastructure markets could leave the firm with too much equipment that it can’t hire out.

However, there’s no sign of this so far. And the company’s increased focus on value-added services such as testing and training could help to reduce this risk, supporting higher profit margins.

In my opinion, Speedy Hire may be too cheap to ignore at current levels.

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The impact of this on the company’s share price was positive. The stock increased in value by around 10%. However, it still appears to offer excellent value for money alongside one of its industry peers.

Improving performance

Speedy Hire’s financial year to 31 March 2018 looks set to be a highly profitable one for the business. Its hire fleet optimisation programme continued during the year. Return on capital employed for the year is expected to have risen from 7.7% in the previous year to around 11%.

Average asset utilisation in the first 11 months of the financial year was 55.4%, which is 4.3% higher than in the prior year. And with acquisitions performing well, the overall outlook for the business appears to be positive.

In fact, Speedy Hire is forecast to post a rise in its bottom line of 28% in the current year, followed by further growth of 17% in the next financial year. Clearly, such growth rates are subject to change and with the company being relatively cyclical, a margin of safety is likely to have been factored-in by investors.

However, with the company having a price-to-earnings growth (PEG) ratio of 0.5 at the present time, it appears to offer excellent value for money. As such, now could be the right time to buy it ahead of further growth potential.

Stunning growth

Also offering strong growth potential is equipment rental specialist Ashtead Group (LSE: AHT). The company has an excellent track record of growth, with its bottom line increasing at a double-digit pace in each of the last five years. During that time, its net profit has risen at an annualised rate of 43%, which highlights just how impressive its performance has been.

Looking ahead, further double-digit growth is forecast. The company is expected to report a rise in its bottom line of 25% in the current year, followed by further growth of 21% next year and 12% the year after. This suggests that it could be worthy of a premium valuation, given its potential to generate above-average growth over a sustained period of time. However, with the stock having a PEG ratio of 0.9, it seems to offer significant upside potential from its current price level.

Of course, there is scope for Ashtead’s financial performance to come under pressure if the macroeconomic outlook deteriorates. However, with what seems to be a sound business model and a wide margin of safety, the company could offer strong capital growth potential for the long run. Therefore, it could be worth buying now after the market’s recent weakness.

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It issued an unscheduled update today advising the market that underlying pre-tax profit for the current year should be ahead of expectations at “not less than £6.4m”. City analysts had been forecasting a figure of £5.9m for 2017/18 and today’s guidance implies an increase of 25% from the £5.1m figure reported last year.

The group’s businesses include training, air traffic control and brokerage services, but its main business is air chartering. This includes private jet chartering, freight and a specialist business which can provide air transport for emergency situations, such as natural disasters.

Three things I like

I’m attracted to Air Partner for a number of reasons. The first is that despite regular acquisitions, the group’s operating margin has risen steadily, reaching 10.4% last year. Return on capital employed has also strengthened, which suggests to me that acquisitions are chosen well and priced fairly.

Cash generation is also strong. The Gatwick-based group has maintained a net cash balance consistently since at least 2012, and has delivered dividend growth averaging 10% per year over this period.

Despite these advantages, the stock remains relatively affordable. The shares now trade on a forecast P/E of 17.4, with a prospective yield of 3.8%. With earnings growth of 10% pencilled in for the year ahead, I believe Air Partner is still worth buying.

A strong recovery

Equipment hire group Speedy Hire (LSE: SDY) ran into trouble a couple of years ago. But in my view the firm’s management have delivered a decisive turnaround, backed by a healthy balance sheet.

The shares dipped earlier this week due to investor concerns over money owed to the group by collapsed construction firm Carillion. However, this doesn’t seem to be a major concern. Speedy Hire’s total revenue last year was in the region of £380m. Of this, revenue from Carillion totalled about £12m, of which £2m was outstanding at the time of its collapse.

Speedy Hire’s management does not expect the collapse of Carillion to have a material impact on the group, and has left guidance for the year unchanged. Based on the latest broker forecasts, this means that adjusted earnings should rise by 46% to 3.57p per share this year.

This momentum is expected to continue into 2018/19, with analysts projecting a further increase of 27% in the group’s earnings per share next year.

This strong momentum puts Speedy Hire on a forecast P/E of 16 for the current year, falling to a P/E of 12.6 next year. A useful 2.4% yield is also forecast and should be covered by surplus cash, providing an additional attraction for shareholders.

With no signs of a slowdown in the UK construction market, I believe the outlook for the firm is strong. In my view, Speedy Hire’s strong momentum and healthy finances suggest the stock remains a potential buy.

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Gaining traction 

YTD shares in Speedy have gained 5% while shares in HSS have lost 52%. The divergence is a result of the different speeds of the two companies’ turnarounds. As Speedy has made progress, HSS has struggled. Indeed, updates published over the past few weeks sum up the situation well. 

Today, in a brief trading update, Speedy said that group revenues for the period to 31 August, excluding disposals, are approximately 7.5% ahead of the prior year, primarily due to growth in services revenues. Meanwhile, net debt at the half year-end on September 30 is expected to be below £70m, down from £85m, while cost-saving efforts have shaved an estimated £3m from the annual cost base. These developments now mean that profit for the full year is expected to be “to be well ahead of the prior year and slightly ahead of the Board’s previous expectations.”

In comparison, at the end of August, HSS warned that in the six months to 1 July, reported losses before tax grew to £30m from £8m in the same period last year and sales fell 3.4%. Adjusted underlying earnings before interest, tax, depreciation and amortisation slipped to £17m from £32m. Managment blamed the rising losses on costs associated with “substantial operating model changes.”

However, despite these diverging fortunes, I believe that both companies could be great turnaround plays. 

Undervalued growth

The opportunity with Speedy is clear. The company has managed to slash costs, reduce debt and revenues are rising. City analysts had been expecting the company to report earnings per share of 29% for the full-year, although it now looks as if this forecast is out of date. Still, based on these old figures the shares are trading at a forward P/E of 16.1 and PEG ratio of 0.6 signalling growth at a reasonable price. 

It’s a little harder to see the value at HSS. Analysts believe that the company will report losses for the next two years as it struggles to turn the business around. Adding to the company’s woes is the fact that it has £230m of net debt, which it is due to refinance next year. 

If management can successfully renegotiate this debt with the company’s banks, investors’ confidence might return. With the shares trading at a price-to-book ratio of around 0.5, it certainly looks as if HSS is an attractive value investment.  

But what are the chances of the company successfully renegotiating a debt refinance? Well, with HSS in the midst of a dramatic overhaul, banks are unlikely to pull the plug straight away. That said, any refinancing might come with more stringent demands from lenders, such as higher interest rates and lending constraints. 

So, I believe that the company will see its borrowing facilities renewed, and this, coupled with the outcome of the strategic revenue, due in November, should bolster confidence in the firm’s outlook, leading to a re-rating of the shares.  

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Today I want to look at a stock which could be the ultimate ‘pick and shovel play’ for today’s investors. Equiniti Group (LSE: EQN) is the UK’s largest share registrar, tracking ownership of shares for 50% of FTSE 100 companies and many others. It’s also the number one administrator of UK public sector pensions, and offers a raft of other similar services.

The firm’s shares rose by 8% this morning, after it announced a deal to acquire the share registration business of US bank Wells Fargo (WFSS) for £176m. If shareholders approve the deal, Equiniti will become the third-largest share registrar in the US.

The numbers look good

The WFSS business being acquired generated an adjusted profit of £14m last year. So the acquisition price of £176m equates to a P/E of 12.5, which seems fairly reasonable. The US business currently has a 22% share of the US market, with the potential to expand.

Equiniti believes this acquisition will add to earnings per share in the first full year of ownership, and provide double-digit earnings growth by the end of the second full year of ownership. Unsurprisingly, some of these gains will come from cost savings. The UK firm believes that by combining operations and moving WFSS onto its own IT platform, it should achieve cost savings of at least £8m.

The size of this deal means that shareholder approval is required. Investors are also going to be asked for some cash. The company plans a £122m rights issue to help fund the deal and reduce the additional borrowing required.

Today’s price rise leaves Equiniti stock trading on a 2017 forecast P/E of 16, with a prospective yield of 2%. This may seem pricey, but I believe this is a business which should become more profitable as it grows. In my view, it’s definitely a stock to hold onto.

A turnaround with legs

Investors in equipment hire firm Speedy Hire (LSE: SDY) have suffered a roller coaster ride over the last three years. But things seem to be changing. The group’s shares edged higher this morning after it said profit margins “have increased” so far this year.

The company says that this is mostly as a result of “growth in non-hire revenues”, such as those from its training and support services.

Trading and management of the group’s hire business also seems to be improving. Average utilisation rates for hire equipment were 53.7% during the last quarter, 6.9% higher than during the same period last year. This much-needed improvement has helped to reduce net debt compared to the same point last year.

Speedy Hire shares now trade on a 2017/18 forecast P/E of 17, with an expected yield of 2.3%. That may not seem very cheap, but if the company can maintain its margin growth, profits could rise rapidly over the next couple of years.

Analysts expect adjusted earnings per share to grow by 30% this year, and by a further 21% next year. If Speedy’s management can deliver on these forecasts, the stock could look good value at current levels. I’d rate the stock as a buy after today’s news.

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However, even with this situation, there are some stocks which could soar in the long run. Here are two companies which seem to offer growth at a reasonable price at the present time.

Improving prospects

Reporting on Tuesday was tool and equipment rental company HSS Hire (LSE: HSS). It announced that underlying revenue in the second quarter of the year was marginally ahead of the prior year. It has seen an improving rental revenue trend due in part to it introducing a programme of sales initiatives. They have generally gained traction with target customers, and have been supported by the strength shown by the company’s Services business.

The cost reduction activities announced in May have progressed. The majority of them have now been implemented, with savings of £10m having been made. In tandem, the company’s new operating model has improved efficiencies, meaning less capital is required. This should help to free-up cash flow and lead to a leaner business model.

Looking ahead, HSS Hire is forecast to report a fall in earnings in the current year of 14%. While disappointing, it is due to follow this with growth of 85% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it may offer upside potential. With a strategy that is gaining traction and improving its business model, its long-term prospects appear to be bright.

Growth potential

Operating within the same sector as HSS Hire is Speedy Hire (LSE: SDY). It is forecast to report earnings growth of 28% in the current year, followed by further growth of 23% next year. This means it has a PEG ratio of only 0.7, which suggests its shares are relatively cheap at the present time.

Having such a wide margin of safety appears to be a requirement for new investors in the company. After all, its track record of growth has been rather volatile. In the last five years its profitability has swung significantly, which means there may be a higher chance of downgrades to its earnings outlook. Therefore, a wide margin of safety provided by a low valuation could allow for substantial capital growth in the long run – even if the company’s performance fails to meet expectations.

As well as its growth appeal, Speedy Hire also offers a fast-growing dividend. Payouts are expected to rise by 44% over the next two years, while still being covered 2.7 times by profit. As such, even with a relatively low yield of 2.5%, the stock could have income appeal.

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Improved business performance

The small-cap equipment rental firm managed to post a pre-tax profit of £14.4m for FY2017, thereby reversing last year’s substantial £57.6m loss, with revenues rising 12.2% to £369.4m, compared to the £329.1m it reported a year earlier.

The improved performance was attributed to actions undertaken by management to identify the underlying issues that affected the group’s performance the previous year. The resulting changes have led to improved engineering efficiency, better equipment availability, and the upgrading of IT and management information systems, all of which have led to improved business performance.

In better shape

The sales force has now been structured to ensure that both large and small customers are treated alike, with management also taking steps to instil ownership and accountability at a more regional level. The group’s hire fleet has also been reduced, with utilisation rates increased, and net debt falling significantly. The business has now been stabilised and is in much better shape to create a solid platform for future growth.

Speedy Hire’s share price has performed well over the past year, gaining 38% in the last 12 months. But at 54p, it is still trading well below the highs of 82.50p achieved in early 2014. After anticipated earnings growth of 21% and 26% over the next two years, the P/E rating drops to 14.5 for FY2019, which in my view still leaves room for further share price appreciation.

UK returns to profit

Another small-cap firm that has undergone a significant turnaround in recent years is Mothercare (LSE: MTC). The leading global retailer for parents and young children is now in the third year of its turnaround programme, and yet management believes the company is still only halfway through the transformation of its brand.

Full-year results for FY2017 weren’t exactly spectacular when compared to Speedy Hire, but nevertheless after a difficult start to the year the group’s UK business recovered in the second half, returning to underlying profit for the first time in six years. International markets also showed signs of recovery with strong growth in Russia and Indonesia, along with a sales recovery in China.

Our friends in the City are expecting earnings to grow by 12% during the current year to the end of March 2018, with an even better 15% improvement pencilled-in for the following year, bringing the P/E ratio down to a very tempting 10.1 for fiscal 2019. I continue to view Mothercare as an excellent long-term recovery play.

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Despite these losses the companies are making progress, although it looks as if the market does not believe in their story.

Today Speedy Hire announced an impressive set of results for the fiscal year ending 31 March, but even on this news the shares have barely budged, rising less than 5% in early deals. For the period, revenue grew 12.2% year-on-year and adjusted profit before tax leapt 224% from £5m to £16.2m. Adjusted earnings per share rose 209% to 2.4p. Surging profits helped the company reduce leverage, and net debt fell 30% during the period from £103m to £71m.

After reporting a loss of £53m for the fiscal year ending 31 March 2016, the heat was on Speedy’s management to produce better results, and it certainly looks as if they have achieved this aim. By refocusing on core customers, selling off non-core assets and using free cash flow to pay down debt, management has been able to return the group to profit and City analysts are extremely optimistic about Speedy’s outlook as the recovery continues to gain traction.

For the next fiscal year, analysts have pencilled-in earnings per share growth of 36% as pre-tax profit is set to hit £19.4m. For the year after, analysts are projecting earnings per share growth of 26% to 3.7p as pre-tax profit rises to £24.5m.

Based on these forecasts the shares are trading at a forward P/E of 18.8, falling to 14.8 for the financial year ending 31 March 2019. This valuation may seem expensive, but when you consider the fact that Speedy’s earnings per share are growing at over 20% per annum, the shares certainly deserve to command a premium valuation.

Turnaround starting

Analysts are also optimistic about the outlook for HSS Hire. Even though shares in the company have lost nearly 50% of their value over the past 12 months, analysts believe the group’s problems will come to an end this year, and after four years of losses, analysts are expecting HSS to report a pre-tax profit of £7.2m for 2017.

Profitability is expected to increase further in 2018 with pre-tax profits of £11.9m projected. Earnings per share are projected to hit 5.6p by 2018, up 93% from 2016’s reported figure of 2.9p. Based on these estimates shares in HSS are trading at a 2018 P/E of 10.1, which looks exceptionally cheap compared to the company’s projected growth over the next two years. The shares currently support a dividend yield of 0.5%.

The biggest issue holding back HSS’s shares seems to be market sentiment. After years of losses, it looks as if the market believes the company won’t pull itself out of the hole and meet City growth targets this year. While this view is understandable, over the past 12 months HSS has conducted an aggressive restructuring, which has been supported by investors, and there is reason to believe that the group’s outlook is steadily improving.

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So what went right? Speedy Hire’s sales increased by 13.4% in the first six months of the year as it continued to focus on improving its operational strength. It disposed of heavy plant as part of a major restructuring that has allowed it to focus on developing its core operations. Notably, it’s reduced its hire fleet by 10%, which has significantly improved its asset utilisation. And as a happy consequence of this improved performance, full-year results are now expected to be ahead of previous guidance.

Speedy Hire’s profit rise means that it has been able to raise dividends by 10% to 0.33p per share. Although this puts it on a dividend yield of only 1.9%, its earnings forecasts show that it could become a sound income play over the medium term. For example, it’s expected to grow its bottom line by 110% in the current financial year and by a further 45% next year. This means that its dividend could be covered 2.7 times next year, which indicates that higher shareholder payouts could be on their way.

Despite Speedy Hire’s bright outlook, its valuation remains low. It has a price-to-earnings growth (PEG) ratio of 0.3, which offers up a wide margin of safety in case its transformation programme stutters. However, there’s little evidence of that being likely from today’s update. Speedy Hire’s strategy is simple, straightforward and focuses resources on its most profitable areas.

What’s the alternative?

Of course, it’s not the only hire services company that could be worth buying. HSS Hire (LSE: HSS) is expected to report a rise in earnings of 57% this year and 41% next year. This puts it on the same PEG ratio as Speedy Hire of 0.3, while HSS has superior income prospects than Speedy Hire.

HSS Hire currently yields 1.4%, which is lower than Speedy Hire’s yield. However, HSS Hire’s dividends are due to be covered 5.3 times by profit next year. This provides it with greater scope to quickly raise dividends. For example, if HSS Hire paid out half of next year’s forecast earnings as a dividend, it would yield around 4.2%. Such a level of payout would be highly affordable and allow HSS to continue reinvesting for future growth.

Even though HSS offers a similarly wide margin of safety and a brighter income future, Speedy Hire is a strong buy at the present time. Its turnaround isn’t yet complete and while there’s a risk of disappointment in the short term from deteriorating operating conditions, Speedy Hire has a low enough valuation to continue to rise following today’s double-digit share price gains.

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