As grocery giant Tesco (LSE: TSCO) toils under the weight of increasing competitive pressures and rising costs, here I am looking at a London stock with far rosier growth prospects than the supermarket: crash test specialist AB Dynamics (LSE: ABDP).
Having said that, investor appetite for AB Dynamics has proved anything but explosive on Tuesday, the stock slipping 4% on a poor reception to its latest trading update.
However, I believe this weakness represents nothing more than light profit-booking following recent price strength (AB Dynamics has risen almost 40% in value over the past six months to top out at record peaks around 627p in April), and a reaction to a solid-if-unspectacular release today.
AB Dynamics — which builds testing and measuring instruments for the automotive industry — advised that revenues advanced 9% between September February, to £11m. And this propelled pre-tax profit 9% higher to £2.5m.
And adding to the good news, chief executive Tim Rogers noted that “we have a good forward order book for the remainder of 2017 and well in to next year which gives us confidence in meeting market expectations.”
While AB Dynamics enjoyed robust demand for its track testing products in the last quarter, a growing emphasis on vehicle safety should underpin strong sales growth in the years ahead.
Indeed, following sign-off from major vehicle safety bodies in Europe and the US, AB Dynamics has enjoyed “very strong demand” for its Guided Soft Targets (or GST) crash test technology in recent months, it said.
And the engineer has plenty of financial firepower for further product development, AB Dynamics having raised £6m through a share placing in December for programmes like its ‘Advanced Vehicle Dynamic Simulator’ currently being designed with Williams. This technology is now on the brink of commercialisation.
On top of this, completion of AB Dynamics’ new facility remains on course for the end of summer and should provide product development an additional shot in the arm, not to mention the company’s manufacturing capability.
Don’t be a dummy
While AB Dynamics may have a more stable earnings history than Tesco more recently, the City does not believe the engineering ace will outperform the British shopping titan in the medium term at least, however.
For the year to August 2017 AB Dynamics is expected to create earnings growth of 7%, and to follow this up with a 27% surge in the following year. But Tesco trumps these figures with anticipated profits expansion of 40% in the year to February 2018, and 30% in fiscal 2019.
And the supermarket also comes out on top in the value stakes, too, Tesco trading on a forward P/E ratio of 18.9 times versus AB Dynamics’ corresponding reading of 24.1 times.
Still, I believe AB Dynamics superior profits outlook demands this better rating.
While Tesco struggles in an increasingly-fragmented marketplace (indeed, latest Kantar Worldpanel data showed its market share slip 50 basis points to 28.1% as of end-March), I believe rising R&D investment amongst the global automotive sector leaves AB Dynamics in the box seat to enjoy resplendent revenues growth in the years ahead.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.