Searching for stocks off the beaten path can often reap terrific returns and, for those looking to load up on great small-cap shares, I believe Headlam (LSE: HEAD) should continue to prove one of those lucrative little-known stocks.
The floor coverings giant has grown earnings by double-digit percentages during the past three years. And the City expects earnings to keep on chugging higher in the near term and beyond, more on which I will be going into detail a bit later.
Of course there are also lots of other shares out there that, in theory, promise terrific earnings expansion in the years ahead, but that face plenty of obstacles to reach that point. And SRT Marine Systems (LSE: SRT) is one such stock.
In choppy waters
SRT — which develops, manufactures and supplies maritime vessel tracking technology — was last down 9% in Tuesday trading following the release of less-than-assured trading details.
The Bath-based company advised that revenues crept 10% higher during the six months to September, but pre-tax losses widened to £1.7m from £1.2m a year earlier.
Its OEM & Module division grew at 12% during the first half, while its em-trak business expanded by 60% year-on-year. Yet although performances in these businesses exceeded expectations, the firm noted that the absence of any material project milestones meant that no project revenues were recognised.
Although the City expects SRT to snap back from a 19% earnings decline in the year ending March 2018 with a 120% rise next year, a forward P/E rating of 41.1 times (sailing way above the broadly-considered value watermark of 15 times) would discourage me from piling in right now.
SRT was whacked at the end of the summer by news that a contract to supply an MDM national maritime domain surveillance system in South East Asia had been pushed back “due to internal project review and budget issues in their current fiscal year” with the end customer.
This resulted in an impairment charge of £1.5m for the current year and, while it is hoped that the deal will be resurrected when the client’s new fiscal year starts next March, this can hardly be considered a given.
I for one will be sitting on the sidelines for the time being, particularly as SRT’s elevated multiple could lead to further selling should the contract delay fail to resolve itself any time soon.
Step on it
However, and as I have already mentioned, I reckon Headlam is a terrific stock for those seeking robust earnings expansion.
The company continues to enjoy solid demand for its floor coverings from across Europe, and like-for-like sales in the UK and Continental Europe rose 2.1% and 3% during January to June. And the Birmingham firm is working hard to keep sales on an upward slant by bolstering its distribution network and expanding the group through shrewd bolt-on acquisitions — it made two more during the first half of 2017.
City analysts expect Headlam to deliver earnings growth of 5% and 3% in 2017 and 2018 respectively, leaving the business dealing on a prospective P/E ratio of just 14.7 times. When you also throw in giant dividend yields of 4.4% for this year and 5.3% for 2018, I reckon the business is worthy of serious attention right now.