Stockwatch: This stock could double, fast

Could Speedy Hire double over the next two years? Its five-year chart shows the FTSE small-cap plant hirer soaring from 20p to 70p over 2012 to 2013, as quantitative easing (QE) drove investors up the risk curve to embrace cyclicals.

The shares then experienced volatile trading between 50p and 80p as the market awaited proof of performance; only to slump to 28.5p during the second half of 2015 after a disappointing July update cited poor revenue at odds with industry prosperity.

The chief executive then stepped down amid declared shortcomings: lack of available equipment, failure to adequately serve small-to-medium-size customers and a new IT system disrupting business.

It's navigated another turbulent period this year, with 40p proving strong resistance until a set of bullish interims this week. The recent breakout was helped by a non-executive director buying 100,000 shares at 42.5p.

New CEO Russell Down wants to grow  market share with new customer service initiativesThe table implies the current level prices in prospects - yielding only 2%, a forward price earnings (PE) of 25 reduces to 18 - but management has guided up expectations, so forecasts will rise.

Put in context, the average historic PE does reflect high multiples.

After disposing of its heavy plant operation to focus on core tools, equipment and plant hiring services, Speedy Hire's rebound reflects investor confidence. Besides cost-cutting, the new chief executive Russell Down wants to introduce new customer service initiatives to grow its share of the profitable market.

Government spending

There is every expectation that Chancellor Hammond could increase infrastructure spending in next Wednesday's Autumn Statement - possibly by £6 billion - as part of a £15 billion programme to protect the UK economy from any Brexit disruption.

This also responds to concerns over a slowdown in the construction industry - another reason why Speedy has traded in a relatively low range. Quantitative easing could boost the value of properties, which could have a trickle-down effect on demand for building services.

Speedy's rebound in adjusted pre-tax profit from £2.0 million to £6.8 million is especially goodThe business cycle looks mature after a seven-year uptrend, so a key question is whether the government can extend the cycle with direct stimulus.

Management omitted any detail on industry conditions in its latest outlook; this could reflect them taking credit for their recovery plan boosting results.

With sporadic reports of construction industry weakness, Speedy's rebound in adjusted pre-tax profit from £2.0 million to £6.8 million, on revenue up 13.4% to £187 million, can be seen as especially good.

Peers doing well

Yet rivals have also been doing well. HSS Hire Group declared similar dynamics in its first-half 2016 results and a third-quarter trading update from Lavendon Group shows revenues up 9% over nine months, with the UK - about half of group revenues - up 8%.

Quite like Speedy, Lavendon cites market share gains driving volume growth, but also highlights an improving pricing environment.

While there's an air of expectation over what the Chancellor could announce next Wednesday, stocks like these are operationally geared to construction and development and are responsive to the infrastructure story.

Lavendon is a plant hire stock to hedge against Brexit risks and gain exposure to UK stimulusThe Speedy vs. Lavendon fight has a wider relevance: how are expectations on sterling, Brexit risks and government stimulus changing?

Lavendon is a more conservative pick given a quarter of its revenues are derived from the Middle East and Africa, which is doing especially well. Revenues were up 20% in 2016, although Continental Europe is up just 2% - representing the other quarter.

Lavendon is a plant hire stock to hedge against Brexit risks while also gaining exposure to UK stimulus measures. At about 140p it trades on a forward PE of just 7 times and yields 4.3% thrice covered by projected earnings (albeit with a variable cash flow record).

The apparent relative value is likely explained by market expectations for slightly softer profit/earnings in 2016, although management has lately guided it "marginally ahead" for 2016. Thus, it's in a no man's land between growth investors seeking upside forecasts, and income investors scared off volatile plant hire as a yield concept.

Meanwhile, for Speedy, Peel Hunt (who is not the corporate broker) bullishly reckons normalised earnings per share (EPS) will soar to 4.7p in the next two years, which does at least have precedent - if briefly - after 4.5p was achieved in the 2014 year.

This broker has just upgraded its stance to 'buy' with a 50p price target, up from 36p, having been negative on the stock with a 30p target in the first three months of this year.

If the chancellor declares useful measures next week, SDY is a good share to benefitI've not seen the rationale, but it could justifiably rest on Speedy's past issues of customer service now being resolved under a new leader, providing a springboard into an industry soon to benefit from infrastructure spending.

You can see from the table below how revenue hasn't even varied 15% in the last five years, so if the chancellor declares useful measures next Wednesday then Speedy is a good, operationally geared share that can benefit.

Since the EU referendum, consensus has been anti-sterling and the UK economy, yet sentiment can easily shift, as the "Trump trade" shows.

Balance sheet to withstand downturn

The classic horror story with plant hirers is that they assume too much debt and lump intangibles on the balance sheet via acquisitions, towards the peak/turning point of a business cycle. Operational gearing in a downturn then means bank covenants get tested, which decimates the stock price.

New CEO plans, director buying, broker upgrades and potential macro stimulus make a buy caseBy contrast, Speedy's end-September balance sheet had only £0.7 million intangibles, its assets predominantly being equipment and trade receivables, with £85.4 million net debt versus £182.3 million net assets.

There was £76.1 million headroom within the banking facilities, "currently covenant-free" which is a positive for the risk profile if conveying an air of transience.

So plant hire stocks are not everyone's cup of tea, but the Speedy blend of new CEO efficiencies with director buying, broker upgrades and potential macro stimulus next Wednesday adds up to a buy case.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.