According to IBM, we generate 2.5 quintillion bytes of data every day. That’s 2.5bn plus nine more zeros. This means that 90% of all data created in the world has been generated in the last two years.
It’s easy to see the growth potential that exists for companies that can host and handle these massive volumes of data. One small-cap player in this market is AIM-listed Iomart Group (LSE: IOM).
Iomart’s share price has risen by 544% over the last 10 years, giving early shareholders a five-bagging gain. But I think there could be more to come.
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According to the company, its Cloud Services business won “a substantial amount of new business” last year. Revenue growth of 17% is expected for the year to 31 March, while adjusted pre-tax profit is expected to have risen by 19% to £22.4m.
This strong performance has resulted in strong cash generation over the year. As a result of the group’s low debt levels, the board has decided to increase the maximum dividend payout ratio from 25% to 40%.
Why are the shares down?
My reading of today’s sell-off is that investors were hoping for a more bullish message on growth. Perhaps another acquisition. The board’s decision to return more cash to shareholders suggests that it can’t find anything else to do with it.
Personally, I’m not too concerned. Iomart is growing strongly with very little debt and high profit margins. I’m happy that the board is taking a cautious approach to future growth. I wouldn’t want to see these key advantages eroded by management determined to grow at any cost.
Iomart stock now trades on a forecast P/E of 16, with a prospective yield of about 1.5%. In my view, this valuation could be a decent entry point for long-term growth — or a takeover — over the next 10 years.
Dull but very profitable
Carpet may not have the glamour associated with cloud-hosting services. But it’s a very profitable business for FTSE All-Share listed Headlam Group (LSE: HEAD) all the same.
Headlam stock has risen by 107% over the last five years, narrowly edging ahead of Iomart (+101%). However, this £525m business isn’t a high-cost retailer with hundreds of expensive shops.
Headlam is a wholesaler and supplies retailers and flooring contracts from a network of warehouses across the UK and Europe. The firm’s focus is on high stock availability and a prompt service, with many delivered on a next-day basis.
This business model generates attractive shareholder returns. Sales rose by 6% to £693m last year, while pre-tax profit rose by 7.3% to £38.2m. The group’s dividend rose by 8.9% to 22.55p and a special dividend of 8p per share was also paid, giving a total yield of almost 5%.
Headlam can afford to be generous — net cash rose by 19.8% to £52.6m last year. This means that about 10% of the group’s market cap is covered by surplus cash.
Obviously the big risk with this business is that it’s cyclical. A UK or European recession would probably cause sales to slide. But I’m attracted to Headlam’s strong cash generation and profitable business model.
For investors with a long-term view, I believe the shares could still be worth considering at current levels.
