Shares in advanced testing systems designer and manufacturer AB Dynamics (LSE: ABDP) were down by a little over 8% this morning despite the company issuing a hugely encouraging set of full-year results.
Revenue at the mid-cap — which supplies the global automotive market — soared 56% to £58m over the year to the end of August thanks to increased demand, new products and growth in international markets such as the US and Japan.
Of course, increasing revenue matters little if a company isn’t also making money. On this front, however, things seem to be going just fine with adjusted pre-tax profit coming in at £13.7m (a superb 59% higher than in the previous financial year).
Although most definitely not a stock for income seekers, it’s worth noting that the total dividend was also hiked 20% to 4.4p per share. A rising cash payout is generally considered a good thing since it implies that management is bullish on the company’s outlook, despite the inevitable reference to “global macroeconomic uncertainty“. Elsewhere, AB’s net cash position had also more than doubled from £15.9m to £36.2m by the end of the reporting period.
So, why the big drop?
It looks like AB has simply become another victim of its own success.
The company’s valuation prior to this morning — 53 times earnings for the financial year just gone — was undeniably punchy. Moreover, the consensus estimate from analysts that earnings per share will motor ahead by another 29% in FY20 still leaves the stock on a forecast P/E of 41. While reflective of AB’s ability to generate high operating margins and returns on invested capital, valuations of this kind do rest on everything proceeding as planned with regard to a company’s growth strategy.
Aside from the above, it must also be remembered that not everyone wants to be invested in great businesses for the long term (we at Fool UK heartily recommend a long-term horizon). With the share price having accelerated 27% in value over the last month alone, some profit-taking was bound to happen.
That said, today’s 8% decline needs to be seen in context. Since listing back in 2013, the company has generated sensational returns for investors. Had you invested £1,000 within a Stocks and Shares ISA back then, you’d now be sitting on almost £24,000. That’s without taking the positive impact of dividends (which you wouldn’t have paid tax on) into account either!
Personally, I’m more than happy to retain my holding for the foreseeable future. As CEO Dr James Routh stated, the market for Advanced Driver Assistance Systems (ADAS) and autonomous vehicle development is “buoyant” and will surely only get bigger as manufacturers are forced by law to introduce technologies that keep their drivers ever safer. The potential for AB Dynamics, given that it is a leader in what it does, is undeniably huge, and will no doubt be boosted by acquisitions made in the second half of the last financial year.
As Terry Smith is keen to point out, the price of a stock, while certainly important, is not the most important thing to consider. Far more crucial, in his view and mine, is whether it’s a quality business with excellent potential to increase earnings going forward.
For me, AB Dynamics continues to tick these boxes and I’ll be looking to add to my holding on any further weakness.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.
Paul Summers owns shares of AB Dynamics. The Motley Fool UK has recommended AB Dynamics. 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.