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Why I’d buy Tristel plc and avoid Genus plc after HY results

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The market likes FTSE AIM company Tristel’s (LSE: TSTL) half-year report today. The shares are up more than 8% as I write, so the UK-based manufacturer of infection prevention and contamination control products must be doing something right.

Trading well and expansion overseas

Indeed, the headline figures are impressive with revenue up 22% compared to a year ago, adjusted earnings per share ticked 14% higher and the directors increased the interim dividend by 23%.

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Tristel reckons its lead technology is a proprietary chlorine dioxide formulation, which the firm uses to addresses hospital infection prevention, control of contamination in critical environments, and veterinary practice infection prevention. I find the growth proposition compelling here as Tristel expands abroad with overseas sales up 45% and representing 43% of total sales.

In August, Tristel made an acquisition in Australia, which delivered positive trading results during the period, and according to chief executive Paul Swinney,  the company is making satisfactory progress with its planned entry into the North American hospital market. The potential for further growth seems huge.

Quality, growth and momentum

With the return on capital running at 17% or so, Tristel scores well on quality, growth and share-price momentum. However, you’ve got to pay up to own the shares. At today’s share price of 162p, the forward price-to-earning (P/E) ratio sits at just under 21 for the year to June 2018 and the forward yield is around 2.2%. Given the firm’s ongoing progress, I’d be happy to buy a few of the shares following today’s update.

But with FTSE 250 animal genetics company Genus (LSE: GNS) I’m more cautious. The firm’s headline figures today include adjusted earnings per share down 9% on a constant currency basis and net debt ballooning by 24%. The company says planned increases in research and development expenditure drove strategic progress but also contributed to a 10% decline in adjusted profit before tax. 

A rich valuation

Given the firm’s rich valuation, I think operational progress seems slow. At today’s 1,747p share price, the forward P/E rating for the year to June 2018 runs at just over 24 and the forward dividend yield is around 1.5%. City analysts following the company expect forward earnings to cover the payout around 2.8 times.

Over the last 10 years the share price has risen around 190% but the compound annual growth rate of normalised earnings, including forecasts for the next two years, runs at just 9%. I wonder if that growth rate justifies such a rich valuation.

That said, Genus operates in a defensive sector and cash generation is good, generally supporting and rising in line with profits. The firm’s return on capital runs around 9% and the operating profit margin at 15% or so. Perhaps the quality of the operation will keep the stock travelling with the momentum we’ve seen over the last few years. However, if it does, it will be without me aboard. 

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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