Having navigated the recession, Goodwin looks poised to grow again.
While Goodwin's (LSE: GDWN) globally distributed factories will crash and bang for 24 hours today just like any other, there's been little noise from The City in reaction to its preliminary results.
I suspect this suits the majority of shareholders in this engineer -- including the Goodwin family, who own over half the company.
And why should there be a great fanfare? Management told us there'd be no growth this year. The focus instead was on maintaining profitability during the slowdown. After a year of 'steady as she goes' statements, that's what's been achieved.
Yet in my view the company looks stingily rated given how it foresaw and sailed through the recession, and could now be poised to grow again.
Less is more
True, I'm taking a glass half-full view of the results. Turnover from across its dozen or so subsidiaries fell for the first time in many years, and while profits were steady, earnings per share have dipped, too:
| All figures in £m | 2010 | 2009 | 2008 | 2007 | 2006 |
|---|
| Revenue | 93.9 | 100.7 | 80.6 | 65.3 | 58.2 |
| Gross profit | 29.9 | 28.7 | 22.4 | 15.2 | 12.8 |
| Operating profit | 14.0 | 13.8 | 10.7 | 7.8 | 5.5 |
| Pre-tax profit | 13.3 | 13.1 | 9.8 | 7.0 | 5.1 |
| Profit after tax | 9.3 | 9.1 | 6.8 | 4.8 | 3.5 |
Basic and diluted
earnings per share | 118.2p | 121.9p | 91.1p | 65.1p | 46.7p |
Yet in truth, flat earnings in the face of global recession is even better than I expected from the management's pragmatic tone when I tipped the share as one to buy for The Fool's Shares 2010 report. The dividend has been held, too, at 27.777p per share, for modest yield of 2.2%.
Unfortunately, the preliminary results don't go into great detail as to how the cost of sales fell by nearly £7 million to bolster profitability.
The weak pound may be one factor. According to Chairman J.W. Goodwin's statement, another is a better performance from companies in the Refractory Division, thanks to the successful integration of acquisitions made in prior years.
What I find particularly heartening here is the directors predicted as much last year. They really do seem to have a good handle on the business.
Goodwin hasn't broken down figures, but the chairman does state reported profits fell by 35% in its dominant Engineering Division, due to 'a policy of conserving the work load to protect its skill base'. I think this means that rather than mothballing production lines and firing staff to maintain profitability, Goodwin eked out the work it had. If demand picks up then such a strategy will bear fruit. And here the omens look fairly good.
Orders picking up again
For instance, at the heavy engineering subsidiary Goodwin International, order input was down 40% at the six-month stage, but for the full year it has come in just 8% lower. The company is also more optimistic about new order potential thanks to signs of greater activity in the critically important energy sector.
True, it hasn't given any concrete guidance for 2011 with today's results, and as usual there are no analysts forecasts available, either.
But there are other positive signs:
- as they felt more secure, managers pressed ahead with £4 million of capital expenditure, for instance, financed internally; and
- the company hired 38 more managers to handle what the Chairman states are "continued growth aspirations over the next five years".
What could go wrong?
The long lead-time of Goodwin's products -- particularly the massive components produced by the engineering division -- mean its results will always be slightly out of step with the immediate economic conditions.
Orders for mission-critical infrastructural components are unlikely to be cancelled on a whim, but future orders can certainly be postponed. We seem to have already seen this in the dip and subsequent recovery in the order book at Goodwin International. This could indicate the company is through the worst.
More negatively, the recent strengthening of the pound may provide a mild headwind to profitability.
Also, while it's no surprise to see annual sales in the US down around a quarter, the 11% drop in sales in the Pacific Basin warrants a close watch, considering those economies held up better during the downturn. I'll be looking out for the emergence of cheaper, equally high-quality rivals.
Steady as she grows
Given how well Goodwin held up during the recession -- when numerous other companies reported steep losses -- I think a P/E of a tad over 10 on today's share price of 1,250p isn't very expensive.
Consider too that over the 15 years prior to the year just gone, Goodwin boasted an annual compound profit growth of 21%.
If the global recovery is on track and Goodwin now returns to its profit growing ways, that would put the shares on a PEG rating of 0.5 -- very attractive for such a well-run, shareholder friendly, and essentially debt-free company.
More share ideas:
> Owain owns shares in Goodwin.
> For two weeks in September we will be opening the doors of our Champion Shares PRO newsletter service. In order to keep our exclusivity, only a select number of our readership will be able to join us. This is your chance to guarantee your place! Click here to join the priority waiting list.
