Time to ditch this high-flying FTSE 250 growth stock?

This FTSE 250 (INDEXFTSE:MCX) stock had a superb 2017. Should investors take profits and move on?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Of all the dilemmas you can experience as an equity investor, deciding when to part company with a winning share can be one of the most difficult. Do you sell your entire holding, bank at least some profit or hold on to everything in the hope of taking full advantage should the stock continue to rise?

This is the conundrum likely to be facing many holders of metrology specialist Renishaw (LSE: RSW). Stock in the Wotton Under Edge-based business more than doubled in price over 2017, even if some of those gains have been given up in recent weeks following the release of its latest set of first-half numbers. 

Over the six months to the end of 2017, revenue grew by 20% at constant exchange rates to just under £279.5m with adjusted pre-tax profit rising 73% to £62.3m.

Renishaw saw growth in all of its metrology product lines over the reporting period with its additive manufacturing and measurement and automation lines the standout performers. Elsewhere, the adjusted operating loss of £1.9m in the company’s healthcare business was far better than the £6m loss in the previous year thanks to growth in its spectroscopy and neurological lines.

Clearly in something of a purple patch, the company now expects revenue for the full year to be “in the range of £575m to £605m” and adjusted pre-tax profits to come in somewhere between £127m and £147m. A “further reduction in losses” in the aforementioned healthcare division is also anticipated. 

With a solid balance sheet (£69m net cash position at the end of 2017) and history of generating consistently high returns on the capital it invests, there can be little doubt that the £3.5bn cap is a quality operation. Right now however, I’d be tempted to shave some profit.

With shares changing hands for 29 times forecast earnings, a lot of positive news and future growth appears priced in. There’s not much in the way of dividends and the departure of co-founder David McMurty as the company’s CEO, despite retaining his role as executive chairman, is an unwelcome if inevitable development.

“Good progress”

With Renishaw’s valuation looking frothy, fellow engineer IMI (LSE: IMI) could be a better option at the current time.

Today’s final results were in line with expectations, despite “mixed market conditions“. In addition to making “good progress” on its strategic initiatives (which included improving operational performance and launching new products), the Birmingham-based business also disclosed further progress in tackling its global pension liabilities. 

While unspectacular, the numbers were still fairly positive. Revenue rose 6% to £1.75bn with adjusted pre-tax profit climbing 8% to £224m. Net debt fell from £283m in 2016 to £265m by the end of last year.  

According to CEO Mark Selway, IMI now expects organic revenues to be higher in the first half of 2018, with a “modest improvement” to margins. The recent acquisition of Bimba —  a manufacturer of pneumatic, hydraulic and electric motion solutions — should also help facilitate the growth of the company’s Precision Engineering division in North America. 

Clearly, this wasn’t enough for the market, with IMI’s stock falling 8% in early trading this morning. Nevertheless, at 16 times expected earnings, I think the company represents better value than Renishaw at the current time. A 3.7% dividend yield for 2018 is also far more attractive than the 1.2% offered by its industry peer.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended IMI and Renishaw. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How many National Grid shares must I buy for a £100 monthly second income?

I think National Grid could be one of the safest options for investors seeking a dividend income. And today its…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

NIO stock is down 90%. Will it recover?

NIO stock has fallen significantly from its 2021 all-time high. But could now be a chance for this Fool to…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

These 2 UK shares could help me reach £1,000,000 in my Stocks and Shares ISA

A FTSE 100 compounding machine and a FTSE 250 value stock are the UK shares Stephen Wright thinks could help…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

If I’d invested £1,000 in Lloyds shares at the start of the year, here’s what I’d have now

The stock market is unmoved, but Stephen Wright thinks last year’s record profits might give Lloyds shares a long-term boost.

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I’ll snap up shares in this growth stock in March if others don’t get there first

This Fool says shares in this growth stock are stable, full of profit, and might be undervalued. But there are…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

My 2 top energy investment trust picks for a passive income

I'm aiming to buy more of these investment trusts for a passive income and the reasonably stable energy sector returns…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

5.5% dividend yield! Shares like these could be great for my retirement

Oliver Rodzianko thinks this company with a stellar dividend yield could be very useful when looking for income from his…

Read more »

Investing Articles

Should I buy this FTSE 250 stock as it soars back to the FTSE 100?

This FTSE 250 stock has rallied following its pandemic woes. This Fool thinks now could be a good time to…

Read more »