2 small-cap growth stocks with monster potential

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bricks

Shares in Vertu Motors(LSE: VTU) have jumped higher in early deals this morning after the company published an upbeat set of full-year results for the 12 months ending 28 February.

For the period, the automotive dealer reported growth across the board with revenue up 16.5% to £2.8bn and adjusted profit before tax up 15% to £31.5m. Unfortunately, this increase isn't reflected in earnings per share, thanks to an increase in the firm's share count from 350m to 400m at year-end. As a result, earnings per share for the period only rose 1.3% to 6.14p. Still, all other important metrics showed impressive growth. Pre-tax profit rose 14.6%, and tangible net assets per share increased 3.1%, although if you readjust for the higher share count, net assets per share increased by more than 20%.

Further growth ahead?

Vertu was founded with the goal of creating a significant player in the UK motor sales industry by consolidating a highly fragmented market. Management has been highly adept at accomplishing that aim so far with revenue growing by 19.4% per annum on average since 2011 as acquisitions have helped boost growth. 

Management has adopted a sensible acquisition strategy, only buying what it can afford. And despite having increased book value from £97.5m in 2011 to £250m today, the company has little in the way of debt, with a net cash balance of £21m reported at the end of February.

Over the past five years, Vertu's net profit has grown at a rate of 38.7% per annum, but despite this explosive rise, investors are still giving the company a wide berth. At the time of writing shares in Vertu are trading at an estimated forward P/E of 7.8 based on analyst forecasts for the year ending 28 February 2018. The shares support a dividend yield of around 3% and the per share payout has grown by 100% since 2013.

It would appear investors are concerned about the group's exposure to the UK economy following Brexit. However, today's results should go some way to allaying these concerns, and if management can repeat the performance of the past five years, there should be lucrative returns on the cards for shareholders.

Cash rich

Brick producer Michelmersh Brick (LSE: MBH) may not be the most exciting company trading on the London market, but that doesn't mean it's a bad investment. 

Over the past five years, the firm has gone from strength to strength, benefitting from the boom in UK housebuilding. Since 2012, shares in the company have risen by nearly 200% excluding dividends as pre-tax profit has risen tenfold. 

Unfortunately, during the past two years, growth has slowed, but management has been focused on reducing debt. At the end of 2016 the group reported a year-end cash balance of £4.7m, which should finance asset expansion and sales growth. Even though the shares appear pricey at 15.2 times forward earnings, Michelmersh looks well placed to return to its growth trajectory as the demand for its products remains robust. The shares currently support a dividend yield of 3%, and the payout is covered twice by earnings per share.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.