In the world of penny stocks, explosive growth potential is fairly common. Yet, seeing this paired with dividends is pretty rare. And with that in mind, Trifast (LSE:TRI) stands out from many of its peers.
The company currently trades at around 67p per share with a market-cap of just over £90m. Needless to say, it’s a pretty small business. But if the analyst forecasts are correct, the penny stock could be on track to see its earnings skyrocket in 2025, causing the share price to more than double to 140p in the process.
Considering many penny stocks lack a revenue stream let alone have positive earnings funding a dividend, this sounds like a pretty extraordinary opportunity. So should investors consider buying shares today?
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A turnaround opportunity
Seven years ago, Trifast shares sat comfortably in the small-cap territory. But since then, the industrial fastenings manufacturer has encountered a series of challenges that have caused revenue and earnings to shrink. This includes supply chain disruptions, inflation, inventory destocking from customers (particularly in Asia), and a leadership change that saw the sudden departure of Mark Belton as CEO in early 2023 after 23 years of service.
The impact of these headwinds is clear when looking at the Trifast share price since 2018, falling by around 75%. However, as dire the situation’s been, the group’s fate may be on the verge of a long-awaited turnaround.
The new management team’s busy executing a new business strategy focused on restoring profit margins. Subsequently, Trifast’s in the middle of an operational restructuring. Unfortunately, that means some employees have been losing their jobs. But these decisions appear to be making a positive impact on the business.
Looking at its latest interim results, gross profit margins have expanded along with underlying operating margins. Subsequently, the return on capital employed has also enjoyed a nice boost.
Sales growth remains elusive. However, if analyst projections about underlying earnings per share jumping from 1.62p to 5.77p in 2025 prove accurate, this may not matter. But how realistic is this projection?
Forecasts aren’t guaranteed
A 256% surge in earnings per share is quite a big ask. But Trifast might actually be capable of delivering. After all, the underlying EPS in its interim results landed at 2.94p.
However, it’s important to note that only one institutional analyst is currently following this business. As such, the 140p 12-month share price target is just one opinion.
Delivering on earnings expectations will most likely help boost the penny stock. But with earnings forecast at 5.77p and a share price target of 140p, that puts the projected price-to-earnings ratio at 24.3. Given the penny stock currently trades closer to 14 times earnings, the company will likely have to convince investors of its long-term potential to justify a premium valuation. And given the group’s recent track record, that could be quite a difficult task.
The bottom line
Trifast appears to be moving back in the right direction, but the firm still has a long way to go. Personally, I’m not convinced the stock will reach 140p by this time next year. However, if management can continue to make strides in margin expansion while also resparking revenue growth, this penny stock could be worth watching.
