I don’t often single out individual growth stocks to write about here at The Motley Fool. But the company I’m looking at today has really grabbed my interest.
The business in question is AIM-listed Supreme (LSE: SUP). This £150m company manufactures and distributes consumer goods such as batteries and vapes. Supreme’s share price has slumped this year, but I’m starting to think the shares look too cheap for me to ignore.
Why I like Supreme
Supreme only floated on London’s AIM market at the start of 2021, but this company was founded in 1975 and has a forty-year heritage of family ownership and management.
Since 1990, annual sales have grown from a few million pounds to more than £120m. Supreme’s customers now include most of the UK’s supermarkets, convenience stores and discount retailers. Other customers include HM Prison & Probation Service and Harrods.
Current boss Sandy Chadha is the son of Supreme’s founder. He owns 57% of the company’s shares and has been with Supreme since he left school 30 years ago.
In that time, he’s transformed the business into a major distributor of batteries and lighting. Long-term suppliers include Duracell, Energizer, Panasonic, Philips and JCB.
In 2015, Mr Chadha spotted a niche in the market and launched an in-house vaping brand, 88vape. More recently, he’s led the business into the fast-growing sports nutrition sector, with brands including Millions & Millions, Sealions and Sci-MX.
Supreme’s products all have one thing in common – they’re affordable, repeat purchases that appeal to a broad range of customers. I reckon this growth stock could also be a good defensive investment during a recession.
Sales have doubled since 2019
Supreme’s recent results have not showed much sign of a slowdown. Annual sales have risen from £62m in 2019 to £127m over the 12 months to 30 September.
Vaping sales rose by 13% during the half year to 30 September, while sports nutrition sales tripled to £6.4m – helped by some acquisitions.
I’m attracted to the group’s strong profitability. Supreme reported an operating margin of 12% last year with a return on capital employed of 51%.
Of course, there are some risks. Battery sales are fairly flat these days. Supreme depends heavily on its vaping products, which generate around half the group’s profits.
One risk I can see here is that vapes could face tougher sales rules. For example, retailers might have to move them from open store shelving to behind a counter, next to the cigarettes.
I suspect that independent vaping manufacturers will also face growing competition from the vape brands run by the big tobacco companies.
Is this growth stock a buy for me?
All stock market investments come with some risk. But I think Supreme looks like a well-run business with a sensible growth strategy.
This year’s share price slump has left this business trading on just 10 times forecast earnings, with a potential 5% dividend yield.
That seems too cheap to me. I’m definitely tempted to buy some Supreme shares for my portfolio today.