240% profit growth makes Speedy Hire plc a star buy

Tools, equipment and plant hire services company Speedy Hire(LSE: SDY) has released stunning results today. They show that its adjusted earnings have risen by 240% as its turnaround gathers pace. Speedy Hire's shares are up over 12% in response, but there could be more capital gains to come over the long run.

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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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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.