Why I'd buy this small-cap growth stock alongside Rolls-Royce Holding plc
Small-cap Midwich(LSE: MIDW) flies under the radar of most investors. Indeed, only around 7,000 shares in the specialist audiovisual and document solutions distributor change hands every day on average, but that does not mean that you should ignore this growth champion.
Over the past 12 months, shares in the company have smashed the broader market, returning 146% as the business has gone from strength to strength. And today the firm revealed that this growth momentum has continued with management now expecting to report revenue for 2017 of approximately £470m, representing growth of around 28% year-on-year. As well as growing revenues by nearly a third, the group has managed to do so while "continuing to improve gross margins in line with the board's expectations."
As a result of this performance, the group "now anticipates reporting adjusted profit before tax for 2017 comfortably ahead of its previous expectations."
City analysts had been expecting earnings per share growth of 78% year-on-year before today's news. It now looks as if this target will be exceeded, which means that the shares, trading at a forward P/E of 22.5 (based on old forecasts) look exceptionally cheap. Specifically, Midwich's PEG ratio is around 0.3. A PEG ratio of less than one signals that the shares offer growth at a reasonable price.
What's more, it looks as if Midwich's growth will continue into 2018. The company made a number of acquisitions in 2017 to help this, the full benefit of which should be seen this year. MD Stephen Fenby noted in today's press release that "through 2018, management will continue to explore cross-selling opportunities in the current portfolio while also evaluating the healthy pipeline of potential acquisitions." So it looks as if there are more deals on the horizon.
Analysts have earnings per share growth of 14% pencilled in for 2018, but this could turn out to be a conservative estimate if Midwich continues to expand at its current rate.
Alongside Midwich, I also like the look of Rolls-Royce Holding(LSE: RR).
Growth target by 2020
Shares in Rolls have struggled over the past year as the company has got stuck into its turnaround plan. On the face of it, the stock isn't that cheap, which could put investors off. However, this is a growth story that will take time to unfold.
Rolls is currently trading at a forward P/E of 27.2, which is painfully expensive when you take into account the group's stagnating earnings. Nonetheless, management believes that by 2020, the firm will be producing £1bn of cash flow, and it's here that the value is to be found.
Rolls' free cash flow last peaked at £781m in 2013 when the shares traded as high as 1,185p, a valuation of just under 26 times free cash flow per share. Cash flow of £1bn works out at 54p per share, which translates into a share price of 1,404 based on the previous multiple. Based on this target, investors could see a return of 64% over the next three years.
That said, management has cautioned that it won't be plain sailing to this target, that's why I believe Midwich would make a perfect partner for Rolls in your portfolio if you're looking for a growth duo.
Rupert Hargreaves owns no share 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.