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Why Renishaw plc Has Surged 10% Today!

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2014 has been something of a roller-coaster ride for investors in Renishaw (LSE: RSW), with the UK engineering company seeing its share price rise by as much as 14% year-to-date in March, and fall by as much as 24% year-to-date in July.

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Indeed, today is yet another dramatic day for the stock, as it has risen by 10% on the back of an impressive set of first-quarter results. Does this mark the turning point for the company and, more importantly, should you buy a slice of Renishaw as a result?

Upbeat Update

Renishaw reported strong growth numbers, with sales being up 28% year-on-year in the first quarter of the current financial year. The company noted that orders in the Far East remained buoyant after an unnamed Asian customer had placed a large order in the fourth quarter of last year. Looking ahead, Renishaw remains confident that the strong growth seen in the last two quarters will continue into the second quarter of the current year.

This bodes well for investors and could mean that market sentiment in the stock continues to improve in the short run.   

Valuation

Although shares in Renishaw remain 11% down on where they started the year, they continue to trade on what appears to be a relatively rich valuation. For example, Renishaw’s price to earnings (P/E) ratio currently stands at 18.8, which is considerably higher than the FTSE 100’s P/E ratio of 13 and means that there is scope for a downward revision to its rating.

Growth Potential

Of course, Renishaw continues to have strong growth prospects. For example, it is forecast to increase earnings by 10% in the current year, which is ahead of the mid-single digit growth prospects of the wider index. However, with a price to earnings growth (PEG) ratio of 1.9, it seems as though the company’s growth potential is priced in.

Looking Ahead

Although Renishaw is most certainly a high-quality business for which sentiment could continue to improve in the short run, for longer-term investors there may be better value elsewhere. Certainly, Renishaw has a global footprint and generates 90% of its sales from outside the UK, but with such a high valuation, increased diversity and strong earnings growth seem to come at simply too high a price.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Renishaw. 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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