The company has engineered an incredible recovery, and the share price has responded.
It's been shown many times that investors hate losses more than they love gains.
So, in an effort to fight back against our primitive Neanderthal minds, I suggest any shareholders in high-end engineer Renishaw (LSE: RSW) should now get up out of your chair, do a dance of unrestrained glee, and then sit back down with a smug look on your face.
Because there are good results, there are great results -- and then there are Renishaw's first-half results to 31 December, which are simply outstanding:
- First half revenues of £129.3 million (up 75% year-on-year).
- Operating profit before tax of £35.5 million (up 400%).
- Earnings per share 39p of (up 400%).
- Proposed dividend per share of 10.3p (up 157%).
All this money flooding in is piling up in the company's coffers, too, with net cash balances some £4 million higher at £28.9 million.
There's even good news on Renishaw's pension fund deficit, which has been reduced by £6.2 million to £31.1 million.
A super cyclical
Not surprisingly, Renishaw's shares soared. As I write, they have gained more than 22% to sail past 1,630p a share. That's a huge move for a £1 billion company.
It's all very different to 18 months ago, when Renishaw reacted to plunging profits by firing 20% of its staff and getting the remainder to agree to a voluntary pay reduction of 20%.
The recovery since then shows the benefits of buying cyclical companies at the trough of despair. Renishaw shares hit 258p in early 2009. The share is a six-bagger since then.
But the benefit hasn't just been felt in the price. A harsh truth of capitalism is that for the companies that survive, a recession is often a chance to become leaner and meaner. There can then be a disproportionate uplift when growth returns, due to superior margins.
In these half-year results, Renishaw's operating margin is running at 27%, which is way above 2010's 15% and even the near-21% seen five years ago. It won't last forever, but shareholders can enjoy it while it does: Profit before tax is 132% higher than the previous best performance, recorded first half of 2006.
Renishaw has also benefited from strength in its Far East Asian markets. At £54 million, sales in the region are double last year's, and now account for 42% of total revenue. Last year they comprised only 36% of sales.
Up, up and away
Renishaw is going great guns, but it certainly isn't an undiscovered gem.
Analysts at FinnCap released new estimates on the day of the results. They're now looking for earnings per share of 80p for the full year to June 2011, followed by 91p next year. These numbers are way above consensus estimates -- which will certainly now rise after these results -- but they still translate into a P/E of 20, falling to 18 for 2011, after today's huge share price rise.
That said, Renishaw is one of Britain's best companies, and it has habitually traded at a premium rating in the past. And Sir David McMurty, chairman and chief executive, sounds pretty bullish, stating:
"The Group started the second half of this financial year with an increased order book, continuing strong worldwide demand for our expanding product range and a healthy balance sheet. There are, of course, potential uncertainties and challenges, but your directors view the future with great confidence."
Is there still any value in the shares at over £16? When I started this article the shares were 'only' up to £15, and I thought there might be. But after notching up another 100p in the time it takes to grab a sandwich, I wonder if investors are getting ahead of themselves.
Renishaw is a great company, but as we've seen so clearly only recently it's also a cyclical one. Paying top dollar for those even as they're generating record earnings is always a risky gambit.
Personally, I'll hold fire and hope for a better chance to buy. Or get a time machine.
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