Will this industrial stock rise by 30%+ following today’s results?

Should you buy this industrial company, or two of its larger peers?

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Building products, systems and solutions group Alumasc (LSE: ALU) has released an upbeat set of results today. They provide clues as to whether now is a good time to invest in it or a larger industrial sector peer such as Rolls-Royce (LSE: RR) or BAE (LSE: BA).

Alumasc’s sales increased by just 2% in the last financial year, but its order book as at 30 June was 11% higher than it was a year ago. This provides a bright outlook for the company and means that it could go on to record its sixth successive year of profit growth.

On the topic of profitability, Alumasc’s underlying earnings rose by 9% and this enabled it to raise dividends per share by 8%. This puts it on a yield of 4% and with dividends being covered three times by profit, there’s scope for a rapid rise in shareholder payouts over the medium-to-long term. The potential for this is set to be improved by Alumasc’s forecasts. The company is expected to grow its bottom line by 14% next year and with its shares on a price-to-earnings growth (PEG) ratio of 0.5, it offers growth at a reasonable price.

Size and scale

In fact, Alumasc offers superior value for money on this basis compared to Rolls-Royce and BAE. For example, the former has a PEG ratio of 0.6 while the latter’s is 1.7. Rolls-Royce’s PEG ratio benefits from the fact that it’s at the beginning of a period of major change, with a new management team set to deliver improved financial performance for the business following a disappointing run of results. For example, Rolls-Royce is due to record a fall in earnings of 56% this year which means that next year’s 34% expected rise in profit will leave it below 2015’s numbers.

In contrast, BAE remains a relatively solid business. It has been a dependable investment in recent years even though the defence industry has endured a difficult period as budgets across the developed world have been slashed. Its yield of 3.9% is behind that of Alumasc, but with BAE having a size and scale advantage over its industrial peer, it offers a lower risk profile.

Furthermore, its balance sheet is modestly leveraged and its cash flow indicates that it has the capacity to invest heavily for future growth. This may not allow it to keep pace with Rolls-Royce’s growth rate, but with BAE having a dividend covered almost twice by profit as well as a higher yield versus Rolls-Royce’s 1.6%, it offers the superior risk/reward ratio. And while Alumasc is well-diversified and has a sound business model, BAE’s track record of stable growth could appeal in what’s set to be an uncertain period for UK investors.

While all three stocks are worth buying at the present time, BAE offers the most enticing risk/reward ratio. Its mix of value, income, growth and stability make it stand out even against high quality industrial peers.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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