While selling industrial filters is far from what most investors imagine when they hear the phrase 'growth stock', the tremendous record of Porvair (LSE: PRV) in recent years has made this relatively boring but dependable business one of the best growth stocks money can buy.
Since 2012 the company's stock price is up over 250%, with good reason as its very capable management team has posted 9% revenue CAGR and 15% EPS CAGR over the period. Its key to success is designing and manufacturing patent-protected filtration systems for everything from aeroplanes to nuclear containment facilities and the casting of molten metals such as aluminium and iron.
One of the most attractive bits of the business is that it doesn't just benefit when it initially designs and sells these systems, but in fact brings in steady recurring revenue over many years due to regulatory mandates or filters wearing down and needing replacement. And since these filters are critical to keeping very, very expensive machinery in tip top shape, customers aren't going to skimp when it comes to replacing them. This gives Porvair impressive pricing power that led to operating margins of 9.3% in the half year to May.
Looking ahead, the company still has plenty of room to grow despite its stellar record over the past half decade. It estimates its main markets will grow at around 3%-5% over the medium term and it believes it can continue growing ahead of the market at large through acquisitions and organic growth.
Over the past five years, the company has invested £33m in expanding into new countries and markets through factory expansion and acquisitions and with £4m of net cash at period-end, there's plenty of room for these investments to continue. With all this upside, Porvair's shares aren't cheap at 25 times forward earnings, but investors looking for dependable growth over the long term would be well-served by taking a closer look at the company.
A more mainstream option
A riskier long-term option I have my eye on is cinema operator Everyman Media (LSE: EMAN). The company currently runs 21 cinemas across the UK that offer both independent critic-pleasers and Hollywood blockbusters while also placing an emphasis on high-quality food and beverage options.
In the half year to June, new screens and food sales led to a 55% year-on-year (y/y) rise in revenue to £18.8m, while improved operational gearing led to adjusted EBITDA more than doubling to £3m. The company has already exchanged contracts for a further nine venues to be opened over the next two years, so growth prospects over the medium term look quite appealing.
However, investors shouldn't get too ahead of themselves as the business is only now transitioning to profitability. Operating profits in H1 were £0.8m and the business is still relying on debt to finance expansion into new markets. On the bright side, pre-financing net cash outflows during the period fell from £7.4m to £2.1m y/y and a new £20m credit line should provide sufficient funding for medium-term growth opportunities.
While its shares are priced at 44 times forward earnings, this isn't an entirely ridiculous valuation for such a fast-growing business. And with just under 2% market share there is plenty of room for Everyman Media to continue expanding for a long time yet.
But if you're looking for a cheaper growth stock, I recommend reading the Motley Fool's report on one top small-cap trading at just eight times earnings. On top of this bargain basement valuation the company has also increased earnings by double-digits four years in a row.
To discover this under-the-radar value and growth stock for yourself, simply follow this link for your free, no obligation copy of the report.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of Porvair. 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.