Is it time to buy these sinking growth stocks?
The UK house market is booming, but you wouldn't think that by looking at the shares of construction equipment leasing companies HSS Hire(LSE: HSS) and Speedy Hire(LSE: SDY). Over the past two years, shares in these groups have declined by 74% and 26% respectively.
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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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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