When I think of a penny stock, I tend to picture a conflicted enterprise with a thin thread balance sheet. Or a mining prospector who is heavy on promise and light on substance. There are certainly many of those around.

However, some small-cap firms are regularly profitable and even pay dividends. Here, I’ll take a look at a former penny stock that I would buy today if I had spare cash in my investment account.

Technicality

Before we get started though, why do I use the phrase “former” penny stock? Well, a common definition of a penny stock is one that trades for less than 100p and a market capitalization under £100 million.

In case Michelmersh Brick Holdings (LSE: MBH), has a market cap of £97m but a share price of 104p (just over the threshold after a 28% year-on-year rise). Hence the “former” penny stock business.

Despite the recent rally, the share price remains 34% below the all-time high of 158p reached in April 2021.

Luxury bricks

So what does the company do? As the name suggests, it sells bricks. However, it tends to specialize in premium bricks and pavers and carries several premium brands.

These are the ones that real estate developers will favor for luxury residential and commercial projects. And these typically have higher profit margins compared to standard bricks (Michelmersh has a solid 36% gross margin).

Every year, the company produces and manufactures more than 125 m of bricks and pavers every year. It also operates a landfill.

Resilience

As we know, the construction sector has really struggled in the last couple of years. House builders were hammered. This was evident in the company’s results in the first half of the year. Revenue fell 15.7% year-on-year to £35.4m, while adjusted pre-tax profit fell 22% to £5.3m.

The main risk here is further weakness in the construction market. And another spike in inflation certainly wouldn’t help.

However, the wider sector saw a 40% drop in volume demand for bricks in the 18 months to June 2024. Michelmersh’s decline was not nearly as severe, highlighting the resilience of the business and even the ability to increase market share in a challenging environment.

Meanwhile, the company has a solid balance sheet. At the end of June, it had no debt and a net cash position of £4.1m.

Reassuringly, management said order intakes were at levels not seen since 2022. A 6.7% increase in the interim dividend demonstrates the company’s confidence in the future.

All indications are that things are slowly turning around.

Passive income potential

Looking ahead, Britain will need to build millions of new homes (of all types) and tackle aging public spaces. That seems like a lot of bricks to me.

This should support earnings and dividend growth over time. The stock currently offers a forward yield of 4.7%. And while no dividend is guaranteed, I’m sure the potential payout is comfortably covered by expected earnings.

The icing on the cake is an attractive valuation. Based on 2025 earnings per share forecasts, Michelmersh trades on a modest forward price-to-earnings ratio of just 10.7.

All in all, I think the stock offers excellent value at 104p today. With cash on hand, I’d consider buying it.