Shares in marketing group Communisis(LSE: CMS) are falling today despite the company having published what look to be rather upbeat full-year results for the year ended 31 December.
According to the figures for the period, the company's adjusted earnings per share rose 17% to 6.1p and adjusted profit before tax was up 15% to £16.7m. Free cash flow grew 7% year-on-year to £12.9m, and net debt fell £9m to £30m. Off the back of these results, management has hiked the company's full-year dividend by 10% to 2.42p.
Unfortunately, the group's reported pre-tax profit for the period fell by a third from £17.3m to £11.6m, due to a significant one-off £6.7m charge. Still, it's the company's free cash flow that's really attractive here. Considering its market capitalisation is £110m, a free cash flow of £12.9m per annum implies a free cash flow yield of 11.7%. So compared to current interest rates, the shares look severely undervalued.
Shares in Communisis look undervalued on other metrics as well. For example, at the time of writing the shares are trading at a historic P/E of 8.3 based on today's adjusted earnings figures. For the past four years, the shares have traded at an average P/E of 10 so a return to this multiple would see the shares hit 61p.
That's not all. Over the next two years, analysts expect earnings per share to hit 6.5p, indicating a potential price target of 65p. Over this period, 5p per share of dividends are also pencilled-in, suggesting a potential total return of 70p -- that's a potential upside of 40% from current levels.
Its fortunes could not be more different to those of the company's peer, St Ives(LSE: SIV).
St Ives has lurched from one disaster to another during the past 12 months, and now the business looks to be on life support.
Even though the company's management issued an upbeat outlook alongside yesterday's results release, there was no hiding from the fact that the firm's loss ballooned to £26.8m, widening substantially from £2.8m at the same time last year. And while net debt declined by £10.4m, the £70m debt pile is still more than twice the size of the firm's tangible asset base. To help keep debt under control, management has slashed St Ives' interim dividend by 72%.
Too cheap to pass up?
City analysts expected St Ives' pain to continue. Earnings per share are projected to decline by 23% for the year ending 31 July 2017 before falling a further 9% to 12.2p for the year after.
However, it could be argued that the low valuation more than makes up for the company's declining growth. The shares currently trade at a forward P/E of 3.8, which could be too cheap for some investors to pass up.
That being said, when compared to its peer, St Ives certainly looks as if it should be avoided. Communisis is just the all-round better option.
Looking for other opportunities?
If it's growth stocks you're after, but you don't like the look of Communisis, there's one stock our analysts here at the Motley Fool believe stands head and shoulders above the rest of the market.
This company is established and already has a record of impressive growth behind it.
In fact, we believe this hidden gem might just be the perfect small-cap growth stock.
Rupert Hargreaves 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.