Today I’m looking at two British industrial stocks I believe could beat the market over the next few years.
Structural steel group Severfield (LSE: SFR) is a useful barometer of the state of the UK economy. It produces steel for buildings, bridges and even stadium roofs. If orders dry up, then we might need to start worrying about a slowdown.
Happily, there’s no sign of this yet. The company said today that full-year profits should be in line with expectations, which were upgraded in November. Market conditions appear to be stable as the group’s UK order book of £242m is almost unchanged since November’s £245m.
Management say that these figures are “in line with our normal order book levels” and reported a balanced mix of demand across “all key market sectors”.
A risk in India
This company also has a second division, which operates in India. Conditions here are also said to be good, but I think it’s worth noting that the order book has fallen from £79m to £65m since the start of November.
If this trend continues it could become a concern, but for now I’m prepared to trust management guidance that the business is delivering a “good operational performance”.
I’d keep buying
Today’s update suggests to me that short-term growth may be limited. But Severfield has taken big steps to improve its profit margins and strengthen its balance sheet over the last couple of years.
Looking ahead, the stock trades on a forecast P/E of 11 with a prospective yield of 3.5%. If market conditions remain stable I’d expect another round of growth over the next year or two. In the meantime, I’d be happy to keep buying at this level.
Boring but very profitable
Engineering firm Hill & Smith Holdings (LSE: HILS) makes “engineered products for the roads and utilities markets”. These include products such as crash barriers, street lights, steel ladders, gratings and much more. Other customers include the energy and chemicals sectors.
A wide mix of customers and operating countries helps to smooth out peaks and troughs in demand. But what really makes this business special is that many of the group’s products have to meet demanding specifications and safety standards. This means that it’s not easy for competitors to enter the market.
This defensive moat makes the business surprisingly profitable. The group’s underlying operating margin rose from 13.1% to 13.9% last year, while return on capital increased from 14.3% to 18.4%.
Hill & Smith is continuing to expand through regular small acquisitions, but strong cash generation means that this hasn’t resulted in high debt levels. Net debt was just £99m at the end of last year, which looks comfortable to me when compared to operating profit of £74.1m.
A dividend hero?
Hill & Smith’s quality is no secret. The company’s share price has risen by 85% over the last three years as investors have bought into the group’s success. One particular appeal is the firm’s dividend, which has risen from 4.2p per share in 2002 to 30p per share today.
The stock currently trades on 17 times forecast earnings with a prospective yield of 2.5%. Although this isn’t cheap, I believe it’s a fair price for a quality long-term stock. I’d be happy to buy today and average down during market dips.