There was a muted response to Renishaw’s (LSE: RSW) half-yearly results this morning, with the share price largely unmoved. The company, which creates precision measuring devices for various industry sectors, has seen its share price soar since the referendum because the weaker pound has increased both the company’s pricing competitiveness and profits generated overseas.
A quality company
This currency tailwind was evident in today’s results. Revenue for the first half came in at £240.4m, compared with £198.5m in the same period last year. This 21% increase includes a 9% currency benefit.
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Profit before tax jumped 25% to £35.7m, although this increase completely reverses to a 7.4% fall at current exchange rates. The weaker pound also helps explain the fall in profit on increased revenues; the company’s international expansion and wages are now more expensive.
The management team should be lauded for including its full-year revenue and profit expectations in the update, allowing investors to more accurately value the company. The predictions were as follows;
“We continue to anticipate growth in both revenue and profit in this financial year and expect full year revenue to be in the range of £500m to £530m and Profit before tax to be in the range of £85m to £105m.”
Renishaw is, in my mind, a quality company. When precision is mission-critical, manufacturers often turn to Renishaw. Aside from being well respected in its niche, the company has a record of strong returns on capital and, aside from a blip around the financial crisis, has an impressive dividend record too. But I can’t quite justify a purchase at current price.
Even at the top-end of expectations, the company would trade at around 20x profit before tax which seems a little steep given the company’s recent growth rates. Buying a quality business like Renishaw at current prices may not be disastrous, but I’m not sure how likely the company is to outperform the market from this valuation.
Outdoor touch-screen specialists and small-cap Zytronic (LSE: ZYT) might be of interest to investors following Renishaw. Its products are bespoke and the company often designs accompanying software which could inspire customer loyalty in the long-run.
The company manufactures in England but sells the majority of product abroad. Unfortunately for Zytronic, currency hedging means it wont gain any benefits from the low pound for over a year.
Revenues were flat last year, but the company reported an impressive 20% operating margin and improved cash-flow. This year has started well, with “orders, revenue and current trading ahead of the same period last year.”
This, combined with a PE of 15, indicates the technology company could possibly outperform Renishaw in the future.