Penny stocks usually see higher volatility than large-cap alternatives. Sometimes, this high volatility is characterised by sharp falls in share prices. Yet as these are small companies with low market caps, a change in sentiment can cause a swift rally with even some relatively small buying interest. Here’s one that I think looks cheap and could come back in favour soon.

Drilling for details

I’m referring to Mincon Group (LSE:MCON). Mincon is a global engineering business specialising in the design and manufacture of rock drilling tools. Over the past year, the stock has fallen by 54%, pushing it down to 39p.

The main reason for this decline has been disappointing financials. The H1 2024 report showed revenue of €68m, down from the €80.6m from the same period last year. Naturally, this fed through to a lower profit (EBITDA) figure of €4.7m for the period. By comparison, this was at €11.8m in H1 2023.

This was put down to several factors. In different updates, the management team has spoken about higher competition, a higher cost base due to inflation, projects being put on hold due to high interest rates and more.

The latest report also spoke of “reductions in construction-related activities in North America.” Ultimately, less activity means less demand for Mincon products.

The valuation

One point that really stood out to me in terms of valuation is the price-to-earnings (P/E) ratio. It currently stands at 0.13. The share price of 39p, divided by the latest earnings per share (300p), equates to 0.13. Given that I usually say a fair value is 10 (that is, the share price is 10 times that of the latest earnings), a value of 0.13 is quite mind-boggling.

There are two ways that I can interpret a number this low. One is that the stock is genuinely very undervalued and due to it being a small company, this dislocation hasn’t been spotted by many investors.

The other interpretation is that investors simply don’t want to own the stock, as they’re concerned about the future prospects. After all, the earnings per share figure that’s used in the calculation is the one from the latest financial report. Yet if the business falls to a loss in the coming period, the EPS figure will have to be updated.

Demand is recovering

The reason why I don’t think investors are too worried about losses is that in the latest update, the firm spoke about how a recovery is expected H2, “with increasing order books and large project orders received.”

Mincon made a H1 profit even with low demand, so with higher H2 orders it makes sense that it’ll post a full-year profit. On this basis, I think the stock does look cheap.

A risk is that the share price takes a long time to recover. Some shares can stay undervalued for years. Another concern is that the market in North America could be sluggish for some time. Yet with inflation moving lower and interest rates starting to be cut, I think the drivers behind the share price fall should ease off.

I’m seriously considering adding the stock to my portfolio in the near future.

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UK trade and manufacturing hit a wall in 2018, and small industrial businesses took the brunt of the crash. The combined effects of Covid and Brexit didn’t help and many businesses folded under the weight of the onslaught. But those that survived are now well-positioned to take the lion’s share as the recovering economy brings fresh demand. 

Mincon Group

When looking at small manufacturing firms with growth potential, one promising mining-related stock always pops up.

Mincon Group‘s (LSE: MCON) a little-known rock drilling company based in Ireland, with 604 employees and £93m market-cap. For almost 50 years it’s been manufacturing all kinds of drilling products for miners, excavators and anyone else that wants to make holes in the ground.

It’s a simple, non-technical business that’s probably seen little change in the past five decades. As a result, it’s unlikely to be the next Nvidia — but it’s enjoyed periods of significant growth in the past. In 2018, the share price reached 153p but plunged soon after and has had mixed results since.

Despite equity increasing steadily over the past decade, the share price is at an all-time low. But it’s in a good industry and compared to earnings, its price is ‘cheap’. With a price-to-earnings (P/E) ratio of only 14, it’s well below the industry average. An improving economy could boost sales, bringing it more in line with the rest of the industry.

Sure, profit margins are half what they were last year but earnings are forecast to grow 20% a year going forward. And with minimal debt and a 4% dividend yield, there might still be life in the old girl. I think there’s good potential in the low-priced shares.

Trifast

Trifast‘s (LSE: TRI) a £97m UK-based company that makes industrial fasteners and category C components — basically, nuts and bolts. Like Mincon, it’s a simple business that’s been around since the 70s with little change to operations. 

Declining income means the company’s recently become unprofitable, with the shares falling 67% in the past five years. But with a low price-to-sales (P/S) ratio of 0.4, it now has lots of room to grow. Last year, it cleared £241m in sales and revenue increased 9.1%, prompting analysts to forecast a 50% price rise in the coming year. And with earnings forecast to grow 103% per annum, things are certainly looking up.

But first, it must climb out of its current hole. Despite paying a dividend of 2p per share, its earnings per share (EPS) is currently running at a loss of 2.8p per share. It’ll need things to improve if it hopes to keep that up. Interim CEO Scott Mac Meekin plans to do just that, “creating an aligned leadership team with the skills and necessary capabilities, visions and drive to maximise 50 more years of success.”

Since the vast majority of industrial manufacturing still requires nuts and bolts, I expect demand will increase as the economy improves. And with revenue and cash flow improving, Trifast may already be on the mend. 

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With that in mind, here are two industrial engineering stocks that could prove to be worthy buys within an ISA for the long term.

Strong performance

Reporting on Tuesday was rock drilling tools specialist Mincon (LSE: MCON). The company’s 2017 financial year was relatively impressive, with total revenue increasing by 28% versus the prior year. This enabled gross profit to move 24% higher, with net profit up 13% versus the prior year. The company was able to overcome cost pressure to protect its gross margin. And while it has absorbed some higher costs thus far, it expects to see upward price movements for its product range during 2018.

Looking ahead, the company appears to have a solid growth outlook. Its bottom line is due to rise by 45% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of 0.4, which suggests that it could offer growth at a reasonable price.

Furthermore, Mincon also announced the acquisition of Driconeq alongside its update. It is a leading supplier of high quality drill pipes and is being acquired for a total sum of €8m. It has the potential to positively catalyse the company’s future earnings growth rate.

While there may be some challenges ahead in terms of being able to successfully pass higher input costs onto customers, Mincon seems to have a sound underlying business which could deliver improving performance in the long run. As such, it could be worth buying now for the long term.

Turnaround potential

Also offering upside potential within the industrial engineering sector is pump maker Weir Group (LSE: WEIR). The company had experienced a hugely difficult period, with its bottom line coming under severe pressure in prior years. However, it was able to deliver a return to positive earnings growth in the last financial year.

This is set to become a trend, with further growth anticipated in each of the next two financial years. In fact, Weir Group is expected to report a rise in its bottom line of 40% this year, followed by growth of 15% next year. This has the potential to cause investor sentiment to improve – especially since the company trades on a PEG ratio of just 0.9.

Certainly, the stock is not yet fully recovered from the difficulties it experienced in previous periods, and it will take time for investor sentiment to improve. But with such a low valuation and positive forecasts, it appears to offer significant investment appeal for the long term.

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Mincon Group (LSE: MCON), for instance, was last moving back towards recent record highs of around 100p per share following a positive reception to its latest market update. The stock was last 1% higher on the day after third quarter performance exceeded the company’s prior expectations.

Mincon — which is involved in the designing, manufacturing, selling and servicing of rock drilling tools –advised that revenues boomed 29% during the nine months ending September, with demand for its Mincon engineering products rising 32% and sales of its third party goods rising 20%.

It advised: “We are seeing growth across all the business units and territories, save for South America where the loss of a key customer delivered a setback at the end of last year.” Indeed, in Africa, North America and Europe the business described trading as “strong.”

Not without risk

And addressing the broad market the engineer noted: “The sector continues to make a broad based recovery, as can be seen by the results of the market leaders.”

The City expects the Irish business to report an 8% earnings improvement in 2017, and to follow this up with a 10% advance next year. As a consequence Mincon deals on a forward P/E ratio of 23.3 times.

The Irish firm’s performance is clearly very impressive, and this is reflected by its market value ballooning 47% since the bells rang in New Year’s Day. And the reorganisation at Mincon Australia earlier this year could provide further ammunition for sales to keep on growing.

Having said that, the uncertain outlook for commodity markets — and particularly in the oil and gas segment — thanks to the spectre of oversupply casts a pall over the long-term profitability of capex budgets for the world’s energy and mining firms. It could therefore put pressure on Mincon’s sales further down the line.

While market share grabs and the huge organic investment it has made in recent times could indeed pave the way for brilliant shareholder returns, investors should be aware that the engineering ace still carries some degree of risk, and particularly given its elevated earnings multiple.

Screen idol

I am less uncertain about the investment outlook over at Entertainment One (LSE: ETO), however, and reckon the business could deliver resplendent riches in the years ahead.

City analysts believe earnings at Entertainment One will trot 7% higher in the year ending March 2018, and an extra 14% advance is chalked in for fiscal 2019.

And despite the FTSE 250 star also enjoying a stellar share price run of late (the firm has risen 14% over the past three months alone), it still deals on a terrific forward P/E ratio of 12.9 times.

This is particularly brilliant value given the “significant momentum” it reported last month following the recent integration of its film and television studios. The popularity of its Family brands Peppa Pig and PJ Masks in international markets continues to bubble higher, while hits like Designated Survivor are pushing series renewals at its Mark Gordon Company division.

I am convinced the future is very bright at the broadcasting behemoth.

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Today I’m looking at two small-cap dividend stocks which I believe could be profitable buys after recent news.

Rock star

Rock-drilling specialist Mincon Group (LSE: MCON) provides the specialist equipment needed for companies to drill deep holes in the ground. Typical customers include miners, oil and gas firms and water companies.

This 40-year-old company has emerged from the downturn with net cash of €32m, and is poised for growth.

According to figures published today, Mincon’s sales rose by 29% to €47m during the first half of the year. Pre-tax profit rose by 26% to €6.3m, while earnings for the six-month period rose 26% to 2.4 cents per share. This provides a healthy level of cover for the interim dividend of 1 cent per share.

This payout is in line with last year’s interim dividend. If the final dividend is also unchanged, it will give the stock a yield of 2%. However, I think there’s scope for the payout to grow.

Mining companies have transformed their financial performance over the last 18 months, but investment in new projects has remained limited. If commodity prices maintain their current strength, I’d expect to see an upturn in spending on exploration and growth projects.

This could create booming market conditions for Mincon, enabling the firm to increase its profit margins, and boost dividends.

The stock has risen by 11% following today’s news. With a forecast P/E of 21, it isn’t obviously cheap. But I think this business could beat expectations over the next few years. In my view, Mincon remain a buy.

1,900% dividend growth

Would be you be interested in a company whose dividend has risen by 1,900% since 2007? The company in question is software group Idox (LSE: IDOX), which provides “specialist information management solutions” to public sector and regulated businesses.

The firm’s spectacular dividend growth has been accompanied by a 500% increase in the value of the group’s shares. Idox has been a super growth story. But what does it offer new investors today?

The firm said this morning that it will spend £5m to acquire a company called Halarose, which will extend Idox’s existing election software business. This valuation equates to a multiple of 4.5 times Halarose’s earnings before interest, tax, depreciation and amortisation (EBITDA) which seems reasonable to me.

Idox shares have performed poorly this year, falling 5% since January. The main reason for this seems to be a disappointing set of interim results in June, when first-half profits fell by 30%.

However, much of this decline was due to acquisition-related items. Second-half performance should be better, and the board has maintained its full-year guidance. It’s worth noting that this business benefits from a lot of ‘sticky’ recurring revenues, so profits should generally be quite stable.

According to the latest broker forecasts, Idox is expected to generate adjusted earnings pf 4.22p per share this year, giving a forecast P/E of 14.6. The dividend is expected to rise by 5% in 2017 and by 13% in 2018, giving a forecast yield of 1.7%, rising to 2%.

At current levels, Idox looks potentially interesting to me.

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Mincon’s sales increased by 11% versus the same period of the prior year, while its pre-tax profit rose by the same amount. Given the cyclically depressed volumes and margins in some of the sectors in which it operates, these are strong results.

Africa woes

In fact, Mincon has seen growth only in the Americas and Australia, with its operations in Africa retrenching in the first half of the year. Notably, the instability of the South African rand has caused significant caution and margin pressure on the South African market. This has further impacted neighbouring countries and it would be unsurprising for this trend to continue over the near term.

Looking ahead, Mincon is forecast to record a rise in its bottom line of just 1% next year. Given that the company trades on a price-to-earnings (P/E) ratio of 18.7, it seems to be overvalued. That’s especially the case since the near-term prospects in a number of key markets are highly uncertain.

As a result, investing in BAE or Rolls-Royce could be a better option. For example, BAE trades on a P/E ratio of 13.6 and is expected to grow its bottom line by 8% next year. This is largely due to an improved outlook for the wider defence industry, with austerity across the developed world being replaced with a more growth-orientated spending policy. This means that defence spending is likely to rise, which would be hugely beneficial for BAE.

On the up

This would also benefit Rolls-Royce, which is due to report a rise in earnings of 34% next year. It offers significant bid potential since its shares have fallen by 30% over the last three years. Weaker sterling also makes Rolls-Royce more attractive to foreign buyers, while its current turnaround strategy is sound and should positively catalyse its profitability.

Rolls-Royce may have a sky-high P/E ratio of 31, but when combined with its growth rate it equates to a price-to-earnings growth (PEG) ratio of 0.9. This indicates that it offers better value for money than BAE, which has a PEG ratio of 1.7. However, this figure doesn’t take into account the two companies’ risk profiles.

In Rolls-Royce’s case it has significant risk due to it being in the midst of a major turnaround. While this may succeed, BAE is a much more stable business that has been relatively consistent in recent years. Therefore, on a risk/reward basis, BAE offers greater appeal than Rolls-Royce, although the latter is still a much more attractive investment proposition than Mincon due to its higher growth rate and lower valuation.

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What

So What: CEO Kevin Barry attributed the poor results to “weakness in the global exploration and mining market”, which he said was “driven by the decline in the price of precious metals.” He also commented that the “significant devaluation” of currencies in Mincon’s key markets had further impacted adversely on the first-half’s results. 

Demand for third-party products sold by Mincon suffered badly, with revenue from them dropping 38% from the same period last year.  However, Barry highlighted the fact that demand for Mincon’s own products had remained stable — the 7% decline in revenue generated by them was, he said, entirely due to adverse currency movements, especially in the South African Rand and Australian Dollar.

What Now:  The company says that it believes the weakness in the global drilling market started to abate in the second quarter of this year, when it invoiced sales 14% ahead of the average for  previous three quarters. It also said that it expects that third party product sales will improve in the second half, driven by the addition of new agencies for drill rig sales in southern Africa. 

Mincon also announced today that it has acquired a majority holding in three companies, at a total cost of €8.7m, which is says will “both increase and diversify Mincon’s product portfolio” and also extend its distribution network in its target markets of eastern Australia and southern Africa.

Despite the poor results, Mincon’s board is recommending its first dividend as a listed company, with a proposed interim payment of 1 cent per share.

Mincon’s share price is currently down 20% so far this year, during which time the FTSE All-Share has remained essentially flat (it’s dipped 0.1%).

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