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2 global leaders I’d buy today

Shares of Dialight (LSE: DIA) moved higher in early trading this morning after the company released forecast-beating annual results.

A global leader in energy efficient LED lighting for industrial and hazardous applications, Dialight lost its way and its place in the FTSE 250 in 2013. However, today’s results show new management’s strategy for reinvigorating the business is working well.

Let me explain why I think now could be a good time to take a stake in the company and why a FTSE 100 global leader is also piquing my interest today.

Light at the end of the tunnel

Dialight posted a 13% rise in revenue to £182.2m from £161.4m. With the US dollar being the group’s major trading currency (70% of revenue is denominated in US dollars), the weakening of sterling provided a favourable impact on revenue of £17.9m. As such, top-line growth at constant currency was 2%.

Underlying operating profit and earnings per share (EPS) more than doubled. The former increased to £13.1m from £6.1m and the latter to 26.9p from 13.3p, beating the analyst consensus forecast of 23.8p.

Management’s changes to the operating model of the business saw non-underlying costs of £16.4m, resulting in a statutory loss and negative EPS. However, exceptional costs were predominantly non-cash, helping the company move to a net cash position of £8m at the year-end, compared with net debt of £3.8m at the end of the prior year. Management expects an additional £2m-£3m of costs in 2017 to complete the transformation of the operating model.

Bright future

The essence of Dialight’s transformation has been a switch to ‘platform engineering’ (standardising the design of product parts used as the foundation for all finished products) and outsourcing manufacturing. The huge efficiencies and cost savings of this move, together with investment to maintain the company’s technological lead and to improve the quality of its sales teams, are set to generate impressive top-line and bottom-line growth in the coming years.

Ahead of today’s results, the consensus EPS forecast for 2017 was 34.9p but I think we’ll see some upwards revision. However, even as things stand, the forecast represents 30% EPS growth, while the P/E is under 28 at a current share price of around 970p. This suggests the shares are good value for the growth on offer, while potential earnings upgrades only enhance my belief that now could be a good time to buy a stake in the business.

Another transformation

Blue-chip Rolls-Royce (LSE: RR) is another global leader that has gone through a tough period and is in the midst of a transformation under new chief executive Warren East, the impressive former boss of British tech champion ARM.

Rolls unveiled the biggest loss in its history (£4.64bn pre-tax) when it announced its annual results two weeks ago. This was the statutory number. The underlying performance was positive — a pre-tax profit of £813m — but was nevertheless 49% down on the prior year’s profit of £1.43bn.

At a share price of 764p, Rolls trades on a forecast 2017 P/E of around 24, falling to nearer 20 for 2018. The company’s transformation isn’t as advanced as Dialight’s, but I believe we could see a similar story unfold in terms of both its business and share-price performance in the coming year or two. As such, I think Rolls’s shares are well worth buying today.

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G A Chester 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.