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Should you buy Churchill China plc or HSS Hire Group plc after today’s results?

I can remember Churchill China (LSE: CHH) languishing on value lists with its difficult trading conditions and low growth prospects around 11 years ago.

Things have clicked for the ceramics manufacturer since those dark days and today’s upbeat interim results follow some impressive double-digit advances in earnings over the last few years.

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Priced for growth?

For the six months to the end of June, revenue gained 12% over the equivalent period last year, operating profit and earnings per share both rose 30%, and the directors hiked the interim dividend by 12.5%.

The company retains some value characteristics, such as a £9.6m cash pile, zero borrowings and a still-manageable pension deficit, but the price-to-earnings (P/E) ratio now seems high. At the current share price around 807p, the forward P/E rating runs at just over 18 for 2017 and the forward dividend yield sits just under 2.7%.

Churchill China is now priced for growth, it seems, and the share price has certainly delivered for investors with a 367% uplift since 2009. City analysts following the firm expect earnings to rise 10% this year and 9% during 2017. In today’s statement, the directors confirmed the firm is on course to meet expectations.   

Shining in hospitality

The firm seems to be driving its best results in the area of hospitality — revenue and profits are growing as the company pushes into export markets. But trading in its retail operation remains challenging, which reminds me of the situation 11 years ago. However, tough control of costs and a shift away from licensed ranges to Churchill-branded products drove up margins and earnings despite a small decline in revenue.

The directors mentioned that Britain’s journey along the Brexit process brings further uncertainty and it’s worth remembering that there’s a large element of cyclicality fired into Churchill China’s business, so with forward earnings growth slowing, I’m cautious about the firm’s high-looking valuation.  

Hoping for a turnaround

Investors looking for a turnaround in the fortunes of tool and equipment hire firm HSS Hire Group (LSE: HSS) will see positives in today’s half-year report. Revenue is up 13.5% on the year-ago figure, adjusted earnings per share came in at 0.1p compared to a loss of 2.27p last year, and the directors held the interim dividend at 0.57p.

The firm’s business model had previously seemed to collapse in terms of its viability. Although the sector is cyclical, the problems appeared to be more about the way the firm executed its operations than about falling demand generally. But management is busy restructuring and changing the way the firm goes about its business, although that involves yet more investment. 

One unwelcome outcome is a rise in the company’s already-gargantuan net debt from around £218m at the end of 2015 to £238.7m today, a figure almost one-and-a-half times the level of half-year revenue. That could be why the share price has struggled to advance this year despite rosy City analysts’ forecasts for earnings. HSS Hire Group could reward investors well from here, but it’s risky.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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