Today I’m looking at two small-cap growth stocks that have both delivered upbeat news recently.
Beating expectations
Shares of engineering and construction consultancy Driver Group (LSE: DRV) rose by as much as 15% this morning after the firm advised investors that profits should be “comfortably ahead” of expectations.
This £50m company has been in turnaround mode since 2015. But the business returned to profit last year and today’s news suggests further gains may be possible.
Driver’s financial year ends on 30 September, so today’s update covered the first four months of the year. According to the firm, trading so far this year has been “significantly ahead” of internal forecasts.
Management said that “current activity levels are also high and the Group has a healthy pipeline of potential assignments”. Combined, these factors indicate that “the outcome for the year as a whole is likely to be comfortably ahead” of expectations.
Too late to buy?
Driver’s share price has performed strongly over the last year, climbing by 50%. Are the shares still cheap enough to consider buying?
Prior to today, consensus forecasts suggested earnings per share of 4.1p this year. I think it’s reasonable to add at least 10% to these forecasts after today’s news, which would suggest earnings of 4.5p per share. At the last-seen share price of 73p, that puts the stock on a forecast P/E of 16.
This doesn’t seem especially cheap to me, and no dividend is expected. However, Driver has generated substantially higher profits than this in the past. If the global construction and engineering markets in which the company operates remain stable, then further growth might be possible.
A potential high-flyer
I believe that aviation services group Gama Aviation (LSE: GMAA) could offer investors the chance to profit from a period of major corporate change.
The group operates in Europe, the US and the Middle East, providing a mix of aircraft charter, management and maintenance services. Organic growth has been boosted by acquisitions and the group’s underlying operating profit rose by 30% to $7m during the first half of last year.
However, the firm’s management isn’t stopping there. Earlier this month, Gama announced plans for a £48m share placing to fund a potentially transformative series of deals. The placing — equivalent to about 40% of the current £112m market cap — will see Hong Kong-based investment group Hutchison become a 21% shareholder.
Using the cash, Gama will purchase Hutchison’s Hong Kong aviation interests for $19.8m. It will also invest $20m in new facilities in the US and at Sharjah in the Middle East, as well as targeting further acquisitions.
It’s a complex picture with a lot of moving parts, so the financial outcome isn’t easy to predict. But the company’s guidance is that this deal will dilute earnings in 2018, be neutral in 2019 and boost earnings from 2020 onwards.
Is Gama a buy?
I’d want to do some further research before investing in a situation like this, but I’m cautiously optimistic about this deal. Gama has generated a high return on capital employed in recent years, which is usually a good indicator that management is investing wisely.
With the stock trading on a forecast P/E of about 10, pre-placing, I believe this could be a potential growth buy.
