I’ve regarded engineering consultancy group Ricardo (LSE: RCDO) with high esteem for some time, so I couldn’t help but sit up and take notice when I saw the share price fall by 10% on Wednesday.
The occasion was a trading update ahead of results due on 13 September, and markets were clearly disappointed by predictions that underlying pre-tax profit for the full year looks set to come in towards the lower end of analysts’ forecasts.
The company put it down mainly to weaker automotive performance due to a lower level of UK orders in the second half, along with “some difficult projects which were delivered in the year.“
Group revenue did rise, from £352m last year to more than £380m, but the year ahead looks threatened by the uncertainty surrounding Brexit. The firm expects revenue growth of 3%-5%, but says that’s “assuming that UK market conditions remain as they are today.“
Time to sell?
Should we bail out of Ricardo shares? I don’t think so, and I still see the company as an attractive long-term investment with both growth and dividend prospects. Ricardo has been growing earnings steadily for years — by 44% over the past three years in fact, which is a great performance.
While that’s set to slow, even single-figure annual growth in the coming few years would still look good to me. And along with that growth, we’ve been seeing progressive dividend rises well ahead of inflation. Yields have been relatively low at around 2.5%, but they’re very well covered and a progressive dividend is key to my idea of a good retirement investment.
And even after the earnings growth of the past few years, we’re still looking at P/E multiples of only around 15. For a company with modest debt of around £26m, that looks good value to me.
Insurance cash
I’ve always been a fan of insurance companies, though they have to be viewed as long-term investments and you need to be able to switch off from the short-term volatility that afflicts the industry.
On that thought, I’m seeing the bearish sentiment towards Esure Group (LSE: ESUR) of the past 12 months, which has led to a 35% share price slump, is overdone. The price was perhaps getting a little overheated in summer last year, and folk presumably saw the firm’s early rapid rise and what looked like increasing dominance of the motor insurance market coming to an end.
But I think that was inevitable, as it’s not the hardest of markets for competitors to get into. But now, I see Esure shares as being attractively undervalued.
Premiums up
The company saw its gross written premiums grow by 25% last year, and the first quarter of 2018 brought an 18% rise over the same period last year. There have been some exceptional weather costs, but the firm reckons it’s “well placed to deliver profitable growth in 2018.“
Liquidity looks fine with solvency coverage at December 2017 of 155%.
For me, the real attraction is Esure’s dividends and a low share price valuation that makes the whole thing looks like a tasty package. Yields are expected to provide 6.9% this year and 7.7% next, with decent cover by earnings of around 1.5 times.
And with forward P/E multiples of 10 and nine for this year and next, I see share price growth potential too.
