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Time to ditch this high-flying FTSE 250 growth stock?

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Of all the dilemmas you can experience as an equity investor, deciding when to part company with a winning share can be one of the most difficult. Do you sell your entire holding, bank at least some profit or hold on to everything in the hope of taking full advantage should the stock continue to rise?

This is the conundrum likely to be facing many holders of metrology specialist Renishaw (LSE: RSW). Stock in the Wotton Under Edge-based business more than doubled in price over 2017, even if some of those gains have been given up in recent weeks following the release of its latest set of first-half numbers. 

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Over the six months to the end of 2017, revenue grew by 20% at constant exchange rates to just under £279.5m with adjusted pre-tax profit rising 73% to £62.3m.

Renishaw saw growth in all of its metrology product lines over the reporting period with its additive manufacturing and measurement and automation lines the standout performers. Elsewhere, the adjusted operating loss of £1.9m in the company’s healthcare business was far better than the £6m loss in the previous year thanks to growth in its spectroscopy and neurological lines.

Clearly in something of a purple patch, the company now expects revenue for the full year to be “in the range of £575m to £605m” and adjusted pre-tax profits to come in somewhere between £127m and £147m. A “further reduction in losses” in the aforementioned healthcare division is also anticipated. 

With a solid balance sheet (£69m net cash position at the end of 2017) and history of generating consistently high returns on the capital it invests, there can be little doubt that the £3.5bn cap is a quality operation. Right now however, I’d be tempted to shave some profit.

With shares changing hands for 29 times forecast earnings, a lot of positive news and future growth appears priced in. There’s not much in the way of dividends and the departure of co-founder David McMurty as the company’s CEO, despite retaining his role as executive chairman, is an unwelcome if inevitable development.

“Good progress”

With Renishaw’s valuation looking frothy, fellow engineer IMI (LSE: IMI) could be a better option at the current time.

Today’s final results were in line with expectations, despite “mixed market conditions“. In addition to making “good progress” on its strategic initiatives (which included improving operational performance and launching new products), the Birmingham-based business also disclosed further progress in tackling its global pension liabilities. 

While unspectacular, the numbers were still fairly positive. Revenue rose 6% to £1.75bn with adjusted pre-tax profit climbing 8% to £224m. Net debt fell from £283m in 2016 to £265m by the end of last year.  

According to CEO Mark Selway, IMI now expects organic revenues to be higher in the first half of 2018, with a “modest improvement” to margins. The recent acquisition of Bimba —  a manufacturer of pneumatic, hydraulic and electric motion solutions — should also help facilitate the growth of the company’s Precision Engineering division in North America. 

Clearly, this wasn’t enough for the market, with IMI’s stock falling 8% in early trading this morning. Nevertheless, at 16 times expected earnings, I think the company represents better value than Renishaw at the current time. A 3.7% dividend yield for 2018 is also far more attractive than the 1.2% offered by its industry peer.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended IMI and Renishaw. 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.

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