Why this small cap offers a 0% return by 2019
Reporting today is a smaller company which seems to have a bright future. It operates within an industry where demand could exceed supply in future years. Therefore, its profitability could improve over the medium term. However, its shares appear to be fully valued, given its future prospects. As such, a return of 0% between now and 2019 seems to be on the cards.
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Improving performance
The company in question is self-storage business Lok'n Store(LSE: LOK). Its first half results show an improvement on the same period from the previous year. Its revenue has increased 3.9% and self-storage occupancy was 4.6% higher. Its serviced document storage business performed well, with revenue up 8.8% against the first half of 2016. This included a rise in the number of boxes stored of 8%, while the number of tapes stored increased by 27% over the 12 months to the end of January 2017.
In addition to higher sales, the company's balance sheet has also improved. The sale of 1.975m shares in November raised £7.9m and a two-year extension to its £40m bank facility means it has the financial strength to develop further. In addition, the new store opening programme continues to gather pace. Development has started on all four of the new sites acquired in the last financial year.
A growing market
The company's improving performance is perhaps to be expected, given the favourable trading conditions for Lok'n Store and sector peers such as Big Yellow Group(LSE: BYG). Demand continues to rise at what seems to be a faster pace than supply, particularly in the south east. This should ensure not only higher revenue and profitability, but also the prospect of relatively consistent growth, which could lead to lower risk profiles for the two stocks.
Outlook
Over the last five years, Lok'n Store's shares have traded on an average price-to-earnings (P/E) ratio of 28.8. This may seem high, but with earnings growth averaging over 44% per annum during the period, it is much easier to justify. However, its current P/E ratio stands at just over 34, which indicates the company's shares are somewhat overvalued. Even when factoring next year's 16% forecast rise in earnings, Lok'n Store still trades on a P/E ratio of 29. This indicates there is no upside potential on offer between now and 2019, since its future prospects seem to be priced-in.
However, sector peer Big Yellow Group (LSE: BYG) has an average P/E ratio over the last five years of 21.7. Today, its P/E ratio is 20.3 and over the next two years it is forecast to increase its earnings by around 9% per annum. This means that if it meets its forecasts and its P/E ratio moves higher to its long-term average, Big Yellow's shares could be trading as much as 27% higher by 2019. As such, it seems to be a far more enticing buy than Lok'n Store at the present time.
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Peter Stephens owns shares of Big Yellow Group. 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.
