Renold (LSE: RNO) was up almost 6% in early trade on Tuesday following the release of its preliminary annual results, but that’s not a big surprise: the business is back on track, while its performance reads +28.5% since early April.
However, Renold has been beaten by Sirius Minerals (LSE: SXX), whose stock is up 111% during the period — why is that, really?
And, equally important, should you continue to bet on either stock?
Renold Is Cheaper Than It Looks
In my opinion, Renold looks like a decent investment case for the long term, although if you are invested right now and are after quick returns, you may be enticed by the opportunity to cash in, given that its stock hit its 52-week high of 72.5p today.
Maybe I’d reduce exposure, but I would not exit the investment.
A supplier of industrial chains and power transmission products with a market cap of £153m, it reported combined pre-tax losses in the region of £13.6m in the two years prior to fiscal 2015, which showed today that the group has become profitable again at pre-tax level, in spite of slowly rising revenues.
Cost-cutting will not last forever, but management has shown a commitment to efficiency and higher returns, so I am happy to give it the benefit of the doubt.
A “significant pensions de-risking project (was) completed in April 2015,” Renold said in its release — this element surely contributed to a surge in its stock price in recent weeks.
Its fundamentals, though, also point to a more solid business than in the past: free cash flow is in positive territory, net leverage is under control, while its debt profile is reassuring.
“The generation of £5.3m of free cash flow from organic activities represents a significant step change from over a decade of organic cash consumption,” Renold pointed out.
The board does recognise the importance of dividends to shareholders, it stated, and this will remain “under active review” as performance improves further. Assuming operating income grows in the double-digit territory, which is a realistic scenario, its forward multiple could drop between 15x and 17x, which makes it a decent buy at 70p a share.
Sirius Is Not Cheap Enough
I really struggle to determine the fair value of this potash developer — its stock trades at 20p at the time of writing.
Firstly, the shares have rallied based on little evidence that its flagship potash mine project near York will ever pay dividends, although it recently announced encouraging results from certain crop studies.
Secondly, until planning permission is granted, you run a risk of losing around 50% of your investment.
Thirdly, trading multiples do not provide a helping hand, given that Sirius is not expected to generate meaningful revenues and profits for several years.
There is talk that Sirius is getting closer to securing planning permissions, but it’s worth considering that the site sits right on the edge of the North York Moors National Park.
How can such a risk be gauged, really?
You’ll likely learn more about it by the end of the year. If things go wrong, the shares may well plummet to between 6p and 12p, where they traded for a long time before April.
