Today, the market received a reassuring half-year trading update from the specialist manufacturer of photonic components and systems Gooch & Housego (LSE: GHH). Trading for the six months to the end of March was “in line with management’s expectations,” and the outlook is positive.
A robust order book
The upbeat message is one you’ll have become used to over the past few years if you hold the shares. The stock has risen 2,800% or so in nine years, from around 43p in spring 2009 to 1,295p today, driven by generally rising revenue and earnings and a change in investor sentiment since the post-credit-crunch lows of the previous decade. Remember all those ‘millionaire-maker stock’ headlines? Well, it really can happen if you pick the right stocks, and in a relatively short period of time too.
Looking forward, the directors expect a higher second-half weighting to trading and say the firm is experiencing positive overall market conditions with “exceptional” demand for critical components used in microelectronic manufacturing. However, there’s been a dip in demand for high-reliability couplers since the beginning of the year, but the directors think that market will recover in the second half. Meanwhile, the order book is higher than it has ever been at around £85m, some 36% above the figure a year ago at constant currency prices.
More to come?
After such a successful multi-year run, you could be forgiven for thinking it could be all over soon and we’ve missed the investing boat. But the firm is positioning itself for growth and created three technical divisions in a drive to become a “more scalable” organisation that can “accommodate the anticipated growth rates.” Chief executive Mark Webster said: “G&H remains committed to our strategy of diversification and moving up the value chain.”
Many believe British manufacturing could be set for a long period in the economic sun. If that proves to be the case, I think Gooch & Housego is a good place to start your research. The forward price-to-earnings (P/E) ratio runs close to 22 for the trading year to September 2019, which isn’t cheap, but I see the valuation as a mark of quality in this case.
Meanwhile, sector peer Morgan Advanced Materials (LSE: MGAM) is around three times the size of Gooch and Housego with a market capitalisation near £924m. The firm presents us with something of a turnaround proposition and trades at a lower valuation. The recent share price of 321p throws up a forward P/E rating of just over 12 for 2019 and there’s a forward dividend yield running at 3.6%.
After several years of gently shrinking earnings, the firm’s full-year results in February saw a “return to organic growth” during the year, which City analysts predict will continue with earnings advances of 9% during 2018 and 6% in 2019.
The recovery plan includes restructuring, simplification, focus, research & development, staff training and a sales drive – the meat and veg of any serious turnaround. It is a sign that the directors are aiming to carve a lean, modern business from the fat of the old, which has Victorian origins stretching back around 160 years. I think the stock is interesting right now.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Gooch & Housego and Morgan Advanced Materials. 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.