These small-cap growth stocks could help you make a million

Speedy Hire

During the California gold rush, selling picks and shovels to prospectors was a more reliable way to get rich than investing in gold exploration plays.

Today I want to look at a stock which could be the ultimate ‘pick and shovel play’ for today’s investors. Equiniti Group (LSE: EQN) is the UK’s largest share registrar, tracking ownership of shares for 50% of FTSE 100 companies and many others. It’s also the number one administrator of UK public sector pensions, and offers a raft of other similar services.

The firm’s shares rose by 8% this morning, after it announced a deal to acquire the share registration business of US bank Wells Fargo (WFSS) for £176m. If shareholders approve the deal, Equiniti will become the third-largest share registrar in the US.

The numbers look good

The WFSS business being acquired generated an adjusted profit of £14m last year. So the acquisition price of £176m equates to a P/E of 12.5, which seems fairly reasonable. The US business currently has a 22% share of the US market, with the potential to expand.

Equiniti believes this acquisition will add to earnings per share in the first full year of ownership, and provide double-digit earnings growth by the end of the second full year of ownership. Unsurprisingly, some of these gains will come from cost savings. The UK firm believes that by combining operations and moving WFSS onto its own IT platform, it should achieve cost savings of at least £8m.

The size of this deal means that shareholder approval is required. Investors are also going to be asked for some cash. The company plans a £122m rights issue to help fund the deal and reduce the additional borrowing required.

Today’s price rise leaves Equiniti stock trading on a 2017 forecast P/E of 16, with a prospective yield of 2%. This may seem pricey, but I believe this is a business which should become more profitable as it grows. In my view, it’s definitely a stock to hold onto.

A turnaround with legs

Investors in equipment hire firm Speedy Hire (LSE: SDY) have suffered a roller coaster ride over the last three years. But things seem to be changing. The group’s shares edged higher this morning after it said profit margins “have increased” so far this year.

The company says that this is mostly as a result of “growth in non-hire revenues”, such as those from its training and support services.

Trading and management of the group’s hire business also seems to be improving. Average utilisation rates for hire equipment were 53.7% during the last quarter, 6.9% higher than during the same period last year. This much-needed improvement has helped to reduce net debt compared to the same point last year.

Speedy Hire shares now trade on a 2017/18 forecast P/E of 17, with an expected yield of 2.3%. That may not seem very cheap, but if the company can maintain its margin growth, profits could rise rapidly over the next couple of years.

Analysts expect adjusted earnings per share to grow by 30% this year, and by a further 21% next year. If Speedy’s management can deliver on these forecasts, the stock could look good value at current levels. I’d rate the stock as a buy after today’s news.

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More reading

Roland Head has no position in any shares 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.

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