Every day, I monitor a wide range of stocks. Despite trying to stay on top of the markets, there are shares that have a large move I sometimes miss. So when I spotted a FTSE 250 stock that had surged higher over the past month, I had to play catch-up fast.
Here’s what’s been going on and why the party might not be over quite yet.
Strong results fuel rally
I’m talking about Goodwin (LSE:GDWN), the UK-based heavy engineering firm with roots stretching back to 1883. It’s not a hugely glamorous business, with the central division designing and manufacturing metallic, composite, and electronic products. Goodwin then sells this to a wide range of sectors, including defence and mining.
Over the past year, the stock’s up 33%, with the bulk of this move coming in just the past month. This coincided with the release of the latest full-year results. Based on the stock reaction, clearly, investors were impressed.
The results revealed a record trading pre-tax profit of £35.5m, a 47% increase year-on-year on revenue of £220m. In terms of specific drivers, particularly strong performance was noted in defence and nuclear markets. It noted having strong long-term contracts in these areas, which bodes well for the future.
Operating cash generation jumped to £67m (from £33m the prior year), allowing net debt to shrink from £42.9m to £13.6m. Overall, it was a great set of results, fuelling the move higher in the share price.
Keeping the party going
One point being raised following the results is the high valuation. The stock’s at an all-time high, with a price-to-earnings ratio of 29.10. This is almost double the FTSE 250 average ratio. Clearly, it’s not a cheap value play.
However, one reason for the high ratio is that investors are looking to the future. If they believe that earnings can increase rapidly further, then it’s not irrational to pay a premium for the stock now. The results do back this up, with earnings per share up 46% over the past year and 93% over three years.
Aside from earnings, business fundamentals look strong. It boasts a robust forward order book (reported at around £287 million). This is supported by long-term contracts in several sectors, which reduce the risk of a sudden drop-off in demand. Income investors will likely take note, given it has just doubled the dividend per share. Although the current dividend yield of 2.94% isn’t particularly notable, it could increase further in the future.
In terms of risks, the main one I see is the supply chain. It relies heavily on key suppliers and critical manufacturing equipment. If this gets disrupted or some problem crops up, it could cause a big headache for management.
Even with that concern, I’m kicking myself for not having spotted this one earlier. With the strong momentum behind it, I don’t think I’ve missed the boat, so I’m considering adding it to my portfolio, and think investors can consider doing the same.
