Is XP Power Ltd. a buy after reporting an 18% revenue rise?

Will 2017 prove to be a strong year for XP Power Ltd. (LON: XPP) after an encouraging performance in 2016?

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Today’s trading update from XP Power (LSE: XPP) shows that the company is on the right track. The developer and manufacturer of critical power control components recorded a rise in its sales of 18% in 2016, which is in line with expectations. Looking ahead, it appears to be well placed to deliver more growth in 2017. So is now the right time to buy it?

Strong performance

The fourth quarter of the year was particularly impressive for XP Power. As expected, there was an acceleration in order intake in the period, with momentum carrying through from what was a positive third quarter for the business. In fact, order intake in the fourth quarter was £37.1m compared with £35m in the third quarter. Both of these figures are well ahead of the £30m from the fourth quarter of the prior year.

This level of performance contributed to total order intake for 2016 of £133.5m, which is an increase of 21% over the previous year. It pushed revenues higher by 18%, as mentioned, with them up by 7% on a constant currency basis.

Positive outlook

In 2017, XP Power’s bottom line is due to rise by 8%. However, in the following year its earnings are forecast to flatline. Clearly, this would be a disappointing result and it could lead to a poor share price performance over the medium term, especially since the company trades on a relatively high valuation. For example, it has a price-to-earnings (P/E) ratio of 15, which should suggest that higher growth rates are expected by the market.

Certainly, the company’s valuation is lower than that of sector peer Renishaw (LSE: RSW). It trades on a P/E ratio of 28.4, but unlike XP Power it’s forecast to record much stronger growth over the next two years. Renishaw’s bottom line should rise by 16% this year and by a further 15% next year. This puts it on a PEG ratio of 1.8. While this isn’t exactly dirt cheap, it does hold much more appeal than its sector peer’s valuation.

Income prospects

XP Power also announced a rise in its dividend today. It’s expected to total at least 70p per share for the 2016 financial year, which puts it on a yield of 4%. Dividends are well covered at 1.5 times and this means that they’re expected to rise by around 12% during the next two years. This compares favourably to Renishaw’s current payout as it only yields 1.8%. But with its dividends covered 2.2 times by profit, they could rise rapidly in the future and that potential could be the decider when choosing between the two.

Since XP Power trades on a relatively high valuation and lacks medium-term growth prospects, its future appeal is somewhat limited. Certainly, a growing and high yield makes it a sound income stock, but with Renishaw offering the scope for greater dividend growth and a lower valuation, it seems to be the preferred option at the present time.

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 has no position in any shares mentioned. The Motley Fool UK has recommended Renishaw and XP Power. 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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