Value investors have been in their element with many UK stocks looking cheap.
However, the long bear market we’ve endured could be coming to an end. Several fallen stocks are turning back up and it may soon be too late to nail down some of the bargains (although nothing is ever certain in the stock market).
An earnings weak patch
Nevertheless, Vesuvius (LSE: VSVS) looks like it’s worth further research. The FTSE 250 company makes its living from providing equipment, products and services for the steel and foundry industries.
Earnings look set to come in around 44% lower in 2023, according to City analysts’ estimates. But there’s likely to be a double-digit percentage rebound in 2024, if assumptions prove to be correct.
Judging by the financial record, one of the features of the business is volatility in earnings from year to year. That situation suggests there’s a cyclical element to operations making the company perhaps unworthy of a rich valuation.
Fluctuating earnings add a layer of risk for potential shareholders. Back in July, the directors said lower profits arose because of subdued market conditions in the steel industry.
Volumes declined for Vesuvius, but pricing held up and that saved earnings from falling further than they did in the period.
Meanwhile, the firm’s foundry division continued to recover. And looking ahead, the directors expect the positive trend to continue in 2024. That’s because customers in the industry will likely restock after a period of running down their supplies.
Targeting growth
Vesuvius is aiming to gain market share via technological differentiation. And because of that investment programme the directors were cautiously optimistic about the outlook for the whole of 2023. Although they did acknowledge the current environment of macroeconomic uncertainty.
Meanwhile, with the share price near 410p, the forward-looking earnings multiple for 2024 is just above eight. And the anticipated dividend yield is an attractive-looking 5.9%, or so.
Vesuvius has done a pretty good job growing the shareholder payment in recent years, despite its record of fluctuating earnings. There was a wobble in the dividend around the time of the pandemic but the payments came roaring back soon after.
Mid-single-digit percentage increases look likely in 2003 and 2004. And that makes the company interesting as a potential long-term income investment for shareholders.
Earnings and cash flow may strengthen further in the months and years ahead if the macro-economic picture improves and if the company sees ongoing recovery in its steel division. Although positive outcomes are not guaranteed, it’s possible Vesuvius could become more highly valued by the market if the business performs well.
The directors seem determined to build the company’s market share. And it’s possible growth and recovery could combine to drive the share price and the dividends higher in the coming years.
Positive long-term investing outcomes are never guaranteed for any company’s shareholders. But the modest valuation here looks like a good starting point when combined with the directors’ optimism regarding the outlook.
This one strikes me as being worth further and deeper research right now.
