The last few years have been very good to shareholders of carpet manufacturer Victoria (LSE: VCP). The acquisition-hungry firm has become one of the largest players in the UK market by buying up small competitors, improving their margins, increasing cross-selling and then re-investing the proceeds back into further purchases.
And even though the company’s stock has risen more than 75% over the past year, I think more astounding growth could be on the way as the group sets its sights on the massive European market. Its latest two acquisitions there total €274.1m and not only broaden the group’s exposure to new regions, but also marked its first foray into ceramic flooring, a huge market in its own right.
Even before these two high-margin acquisitions, revenue has been growing quickly with sales up a whopping 24% year-on-year in the half year to September. Much of this growth came from acquisitions but I estimate organic growth of around 4% was recorded in the period, which is very, very good.
With growth accelerating and a stellar history of consistently improving margins and cash flow across the business, I think Victoria is setting itself up for another great year.
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Also on my list is digital marketing software provider dotDigital (LSE: DOTD). The company’s share price has leapt by 50% in the past year as its dotmailer e-mail and multi-channel marketing tool has caught on with clients looking for effective, easy-to-use automated methods to stay in contact with prospective and current customers.
With a highly effective, but low-cost, core product, dotDigital has had few problems finding clients ranging from small businesses to FTSE 350 firms. In the half year to December, revenue was up 25% to £18.8m due to a small bolt-on acquisition and impressive organic expansion of 17%.
And unlike many small firms that are growing rapidly but lose loads of money, dotDigital is profitable and has a large cash position. This is in large part due to the fact that over 80% of its revenue is highly profitable recurring sales from existing clients. In 2017 this led to EBITDA margins hitting 31.5% and net cash rising to £20.4m, although a recent £11m acquisition will dent this figure.
With a great product in a fast growing market, cash on hand and proven profitability, I think dotDigital is attractively priced even at 30 times full year 2018 earnings.
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A more out-of-this world option I’ve got my eye on is Gooch & Housego (LSE: GHH), which is an expert in designing high-quality optical components for end markets ranging from space agencies to health imaging and a wide variety of industrial applications.
In the year to September the group’s revenue jumped 18.7% on a constant currency basis to £112m due to organic growth and a small acquisition. This growth was driven by particularly strong demand and management is investing heavily in both R&D and acquisitions to support what are expected to be years of strong growth.
And in the meantime the business is still strongly profitable with adjusted pre-tax profits hitting £16.1m last year and its net cash position rising to £14.9m at year-end. While Gooch & Hosuego isn’t cheap at 26 times forward earnings, the group’s strong competitive position and high growth prospects make it very attractive to me.