Shares in FTSE 250 firm Oxford Instruments (LSE: OXIG) bounced 15% on the release of its H1 2025/26 results.
Since then, they have fallen slightly, leaving them 5% below their 24 January one-year traded high of £21.90.
So, some value might remain in the stock, which I could capture if I added to my holding in it.
But is there enough to make it worth my while?
Were the numbers that strong?
The H1 results published on 11 November were more exciting looking forward than they were looking back.
Revenue fell 7.9% year on year to £185.5m, while operating profit dropped 22.9% to £24.7m.
Operating profit margin declined 2.8% to 13.3%, and earnings per share decreased 29.2% to 33p.
Blimey. So, why did the share price soar?
Firstly, the explanation provided looked solid. US tariffs on the UK announced during the period caused delayed orders for, and shipments of, Oxford Instruments’ equipment. Meanwhile, Chinese export controls on rare-earth minerals affected some of the firm’s critical material supplies.
Secondly, management has moved quickly to mitigate these risks. Order books were repriced to take account of new tariffs, and supply chains were reorganised.
And thirdly, the firm has reiterated its strong medium-term guidance (to end-2027/28) on the back of these changes.
Strong business outlook
Additionally positive was that the firm announced strong performance guidance going forward.
This includes a compound annual revenue growth rate of 5%–8%. It also features an adjusted operating margin of 20%+ by end-2027/28 and a return on capital employed of 30%+ by that point.
The share price rise was further fuelled by a £50m increase in its current share buyback programme to £100m. These tend to support such gains. A 5.9% lift in the dividend to 5.4p would have done no harm either.
I still think that further sudden tariff changes could impact the company’s earnings growth over time. It is these that drive any firm’s share price.
That said, analysts forecast that Oxford Instruments’ earnings will grow by a stellar 39% a year to end-2027/28.
How’s the valuation now?
The discounted cash flow (DCF) model uses cash flow forecasts for any business to pinpoint where its shares should trade.
This provides a ‘clean’ valuation, unaffected by the over- or undervaluations present in any business sector.
I have found this extremely useful over the years in ascertaining the gap between any stock’s price and its value. And it is in the gap between these two measures that big, long-term profits can be made. That is because assets tend to trade to their true worth over time.
In Oxford Instruments’ case, the DCF shows the shares are trading almost exactly around their ‘fair value’ right now.
My investment view
I believe that Oxford Instruments’ earnings will keep growing strongly, which would justify a higher price at some point. But that point is not now, in my view, as it is currently fairly valued. But I will be looking to add to my holding in the firm if the price-valuation gap widens.
In the meantime, my attention is on other much more undervalued stocks that have recently caught my eye.
