British engineering firms are a little out of favour these days, with many expecting Brexit to do them some damage. But it’s a sector that definitely should not be written off, and I reckon there are some top-class companies among the smaller constituents:
An oversold bargain?
Shares in Castings (LSE: CGS) have had an erratic couple of years, and they weren’t helped by a 5.7% fall, to 407p, after Friday’s first-half results were delivered.
Sales for the half came in at £57.9m, down from the £65m recorded at the same stage a year ago, and pre-tax profit dropped to £7.08m from £9.51m. The company, which does industrial castings and machining, had previously reported “a softening in demand from our main customers“, and it seems that has continued.
And while Castings doesn’t expect any further falls in demand, it does “not expect to see any improvement for the remainder of the financial year“.
That suggests current forecasts for a 15% drop in earnings per share might be pared back a little now, after first-half EPS came in 25% down. That would suggest a forward P/E of probably around 14–15, although a predicted earnings uplift in the year to March 2018 would drop that to around 13. For a company offering dividend yields of around 3.5%, that’s actually not bad.
There was no mention of Brexit effects in the latest update; however, close to 40% of the firm’s turnover last year came from the EU, so there has to be some risk there over the next few years. But if we are at or near the bottom of a cyclical downturn, we could be looking at a decent long-term bargain here.
An impressive recovery
Looking at other engineering firms, I see shares in structural steel supplier Severfield (LSE: SFR) have also been through some ups and downs of late, though a rally since early July has seen them recover to a loss of 4% over 12 months — but over five years we’re looking at a 39% fall.
Earnings have, however, grown nicely over the past couple of years, and there are double-digit EPS rises on the cards for this year and next. That would give us a forward P/E of 13 for the year to March 2017, dropping to 10.5 on 2018 forecasts — and suggests PEG ratios of 0.5 for the next two years, where around 0.7 or lower is generally considered a good growth indicator.
On top of that, the firm’s dividends, which were curtailed in 2014, have already been reinstated and are set to show some nicely progressive gains — after yielding 2.7% this year, analysts are expecting increases of 23% and then 22% which would take the yield up to 3.7% by March 2018.
In its AGM trading update in September, Severfield told us that its UK order book stood at £268m as at 31 August and had “remained at a very strong level in the period following the EU referendum result“, adding that “Our pipeline of potential future orders has also remained stable with a good balance of work across all key market sectors“.
In addition, an order book of £37m in India apparently “continues to generate an encouraging level of new opportunities amid signs that economic optimism in the country is beginning to increase“.
First-half results should be with us on 22 November, and I’ll be looking for more signs of an impressive recovery.
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Alan Oscroft 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.