With a market cap of just £58m and a business model built around designing computer boards built to withstand 'rugged environments' for defence industry use, its little surprise that Concurrent Technologies (LSE: CNC) has flown under the radar of many investors. But with three straight years of earnings growth behind it, great margins, and a cash-heavy balance sheet, I reckon this hidden growth share is one to watch.
Its strength lies in its ability to design computer boards that can operate in temperatures ranging from minus 40 degrees to as hot as 85 degrees, as well as withstand high levels of vibration and shock. Needless to say, this technology is of great use to militaries, the aerospace industry and telecoms companies, among others.
With a history of turning out high quality, durable products since 1985 and with offices in the UK, US, India and China to serve local customers, the company has built itself a wide moat to entry for competitors. And clients have found that it's better not to skimp on the company's mission-critical technology, which means incredible pricing power. The firm's enviable EBITDA margin of 26.2% in 2016 shows the effects of this pricing power in action.
Margins of this level and low capital needs provide management with plenty of cash flow. At the end of December this cash had built up into a very neat pile of £7.8m, which is plenty considering revenue in the year was only £16.4m. This healthy balance sheet gives management the firepower for bolt-on acquisitions at the same time as paying out a reasonable 2.59% yielding dividend.
The potential for acquisition-led growth and the large addressable market for organic growth, together with high and rising margins, plenty of cash and a reasonable valuation of 12.5 times forward earnings makes Concurrent Technologies a stock I'll be following closely.
Powering up for high growth
XP Power (LSE: XPP) is a much larger growth share with a market cap of £475m, but as the developer of fairly obscure power control components for the electronics industry, it's unsurprisingly little known to the majority of investors. This is a shame, because with four consecutive years of positive earnings growth behind it, high margins and plenty of room to grow its market share, the stock is one to watch.
The key to the company's success is the bespoke design of power control systems for items such as drug delivery devices, factory machinery, or high-end communications devices. Being able to rely on suppliers for these critical items is obviously of paramount importance for customers, which gives XP high barriers to entry once it is on a customer's approved vendor list.
As with Concurrent, XP puts this pricing power to work and notched up EBITDA margins of 25.4% last year, which led to impressive free cash flow of £23.6m from £129.8m in total revenue. Sales are also moving in the right direction and in Q1, constant currency revenue bumped up 23% and the order book increased by 36% year-on-year.
With only 6.1% global market share at year-end, XP Power has plenty of room to grow organically and through acquisitions funded by high cash flow. With net cash on the books, a decent 2.9% yielding dividend, and double-digit growth, its stock looks like a good value at 19.5 times forward earnings.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended XP Power. 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.