One small-cap value stock I'd consider before IQE plc

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IQE Photonics

Before I take a fresh look at tech superstar IQE (LSE: IQE), I'm going to consider the potential attractions of a small-cap software group that's released a year-end update today.

Solid results

Technology firm Sanderson Group (LSE: SND)produces software systems used by trade customers including retailers and food and drink companies. Examples include 'click & collect' systems and software to manage inventories of ingredients for food and drink producers.

Systems like this are increasingly considered essential for maximising a company's profits and controlling its costs.

In today's year-end trading update, Sanderson said that revenue for the year ended 30 September is expected to be about £21.5m. That's marginally below analysts' forecasts for sales of £22.25m for the year, a factor which may explain why the group's shares have fallen 4% today.

I don't think investors need to be too concerned about this slight miss. Today's trading statement guides for adjusted operating profit of £3.9m. This gives an adjusted operating margin for last year of 18%, which is a slight improvement on last year's equivalent figure of 17.3%.

Growth prospects

The group has reported several new customer wins over the last year, ending with an order book of £5.8m, up from £3.02m a year ago. Management describes the order backlog as "optimal" and says that net cash at the end of September was "over £6m", up from £4.34m at the same point last year.

Today's figures suggest to me that analysts' forecasts for earnings of 5.4p per share this year are likely to be broadly correct. On that basis, the group's stock trades on a forecast P/E of 13, with a prospective dividend yield of 3.6%.

At under 70p, I believe the shares could be worth a closer look for small-cap investors.

The next ARM Holdings?

It's a completely different picture at advanced semiconductor wafer group IQE.

Shares in this high-tech firm have triple-bagged this year, as investors have raced to buy into an exciting growth story. Following the company's recent interim results, IQE shares now trade on a 2017 forecast P/E of 44, falling to a P/E of 37 for 2018.

There's no dividend, so what's the appeal of this high-octane investment?

I'm not a technical expert, but my understanding is that IQE makes semiconductor wafers using more advanced materials than silicon. These are used by manufacturers to make the most high-performance processing chips and sensors in devices such as top-end smartphones and robotics.

The company claims to be the global leader in this field and has a number of major new products due to be launched over the next couple of years. Management believe that the market for its technology is approaching an inflection point, with massive growth potential.

My verdict

In my view, this is a pure growth buy. Based on recent trading, the stock looks expensive. But if IQE does reach the hoped-for inflection point and its sales multiply, the stock could be good value. It could even become the next ARM Holdings, a true tech superstar.

I don't know enough about IQE to judge how likely this is, but I can say that the company appears to have a solid financial platform for growth, and strong investor backing.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.


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