A small-cap stock to buy now

This company’s finances are improving and the outlook’s positive. Here’s why I’d buy this small-cap stock and hold it as the recovery continues

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s been a couple of years since I last covered equipment rental company and small-cap stock VP (LSE: VP). Back then, I decided not to buy the stock because of concerns about the company’s high level of borrowings. However, I’d buy shares in VP now.

Why I’d buy this small-cap stock now

Today’s full-year results report sets out strong progress with debt reduction. The company used incoming cash flow in the period to pay off a big chunk of its borrowings. And on 31 March, net debt had fallen by around 24% compared to a year earlier, to just under £122m.

That’s still a thumping pile of other people’s money, but I reckon VP will continue to work at paying it down. However, one of the risks with the stock is the underlying cyclicality of operations. If there’s another general economic downturn, big borrowings could become a problem. That’s why I like to see cyclical firms getting into a strong financial position when trading is booming. And, right now, the outlook for the business is bullish.

If VP keeps paying off debt year after year until it’s gone, it can then direct its cash flow straight to reinvesting in equipment. When, and if, that happens, the business will probably be in great shape. And the good news is the financial record shows an improving trend now.

There’s also been a conclusion to the Competition and Markets Authority’s long-running investigation. The bottom line is VP must pay a penalty of £11.2m after a breach of competition law involving three “major” suppliers of groundworks hire equipment.

VP reckons it “fundamentally” disagrees with the CMA’s conclusions but the directors have decided not to fight the findings. In that way, the company and its shareholders will be spared further costs and uncertainty. I reckon that’s a good decision because the process has been dragging on for around four years.

Trading well and a positive outlook

The business is trading well. And looking ahead, the directors reckon the market backdrop for VP is “positive”.  Major infrastructure sectors, such as water, rail and transmission are “primed for escalating growth in the coming year.”  

I think the recovery we’ve been seeing in the building and construction sectors is encouraging. And there’s a potential tailwind for VP from the government’s drive to “build back better” following the pandemic. It’s hard for me to imagine anything other than booming demand for rental equipment in the years ahead. Although I could be wrong in that assessment and lose money with VP’s shares.

Nevertheless, chief executive Neil Stothard said in today’s report the management team is “excited” about the prospects for the business in the coming year. And I’d embrace the cyclical and other risks and buy the small-cap stock now as part of a diversified portfolio.

With the share price near 865p, the forward-looking earnings multiple is around 13 for the current trading year to March 2022. And the anticipated dividend yield is about 3.7%. I reckon that valuation looks undemanding.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any 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.

More on Investing Articles

Young woman holding up three fingers
Investing Articles

3 stocks Fools bought over 10 years ago and still hold

The Motley Fool’s approach to investing prioritises buying and holding quality stocks for long periods of time.

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

8.1% yield! Here’s the dividend forecast for British American Tobacco shares through to 2027

British American Tobacco shares have been a prized commodity for investors seeking a large passive income. Are they a potential…

Read more »

House models and one with REIT - standing for real estate investment trust - written on it.
Investing Articles

1 FTSE 250 stock trading well below book value

Stephen Wright thinks investors have a number of attractive possibilities with a FTSE 250 REIT trading at a discount to…

Read more »

Edinburgh Cityscape with fireworks over The Castle and Balmoral Clock Tower
Investing Articles

Up 10% and 9% in a week! Are these 2 FTSE 100 stocks set for a stellar recovery?

Harvey Jones picks out two overlooked FTSE 100 stocks that burst into life last week and examines whether they can…

Read more »

Hand is turning a dice and changes the direction of an arrow symbolizing that the value of an ETF (Exchange Traded Fund) is going up (or vice versa)
Investing Articles

3 standout ETFs to consider for an ISA or SIPP in May

ETF products can be a great choice for an investment account or SIPP. Here are three with significant long-term return…

Read more »

ISA coins
Investing Articles

£20,000 invested in this Stocks and Shares ISA 5 years ago is now worth…

Our writer looks at the typical returns on an ISA over the past five years. But with a bit of…

Read more »

Shot of an young mixed-race woman using her cellphone while out cycling through the city
Investing Articles

Here’s the dividend forecast for Rolls-Royce shares through to 2027

Do predictions of explosive dividend growth make Rolls-Royce one of the FTSE 100's hottest dividend shares? Let's take a look.

Read more »

Businessman hand stacking up arrow on wooden block cubes
Investing Articles

Up 14% in a week but still at a 5-year low! Can this beaten-down UK share lead the next bull run?

Harvey Jones has been keeping close tabs on a troubled UK share that suddenly sprang into life last week. So…

Read more »