2 turnaround small-cap stocks with big potential

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Today's interim results from Judges Scientific(LSE: JDG) show that the firm has staged quite a comeback from the doldrums it found itself in 12 months ago.

It aims to acquire and develop scientific instrument businesses and today's figures are impressive. Revenues elevated 20% compared to a year ago, and adjusted basic earnings per share surged back by just over 65%. The directors displayed their ongoing confidence in the outlook by pushing up the interim dividend by 11%, and the payout will be covered a comfortable five-and-a-half times by adjusted earnings.

Well-balanced progress

The financial recovery looks well-balanced. Cash from operations gushed more than 80% higher and the cash balance put on 48% to almost £9m helping to push net debt down by almost 44% to £5.8m. The balance sheet is in good shape with total borrowings running around twice the level of last year's operating profit.

Around 14% of the revenue increase came from organic growth, which proves the company is not 'manufacturing' its progress with expensive acquisitions alone. However, buying other businesses, building them up and harvesting the added value is central to the firm's strategy. So it's encouraging to see the announcement of two post-period deals with the acquisition of Oxford Cryosystems for £4.5m and an increase in the firm's share of Bordeaux from 51% to 75.5% costing £1.3m. Judges Scientific is putting some of its money to work by doing more of what it does best.

Strong order book

A strong order book makes the directors confident that full-year expectations will be achieved. City analysts expect earnings to elevate 30% this year and 16% during 2018, which looks like a decent rate of growth. At today's 1,995p share price, the forward price-to-earnings (P/E) ratio sits just below 16 for 2018 and the forward dividend yield at almost 1.7%. I don't think the valuation is excessive and I reckon we can expect a lot more from Judges Scientific.

Meanwhile, Gulf Marine Services(LSE: GMS) demonstrates with its interim results today that it is in an earlier stage of turnaround than we are seeing with Judges scientific.

The firm operates a fleet of self-propelled and self-elevating support vessels (SESVs) and the downturn in the oil and gas services industry sent earnings and the share price into decline over the past few years.

The carnage is evident in today's results, which show revenue tumbling 47% compared to a year ago and adjusted diluted earnings per share plunging by 78%. The directors decided to preserve cash and axed the interim dividend completely - grim! Yet City analysts are optimistic that a recovery is around the corner and forecast a rebound in earnings for 2018.

High borrowings but...

There's no doubt that borrowings are high at around £308m, which is almost twice the market capitalisation, but the tangible asset figure more than backs the debt. Ongoing cost-control measures and progress with new contracts should help the firm to keep up with interest payments. The directors reckon a secured backlog of work runs at £143m or so and tender activity in Europe and parts of the Middle East is good.

The share price hasn't moved much today, suggesting the bad news is already in the price and the market has its eye on the future. I think 'right now' looks like a good time to run your slide rule over the firm.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Judges Scientific. 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.