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UP today! This FTSE 250 stock is evolving and here’s why I’m tempted to buy

The FTSE 250’s Spirent Communications (LSE: SPT) has shaken off the general doom and gloom affecting the markets and the share price is up more than 5% today as I write. The full-year results report contains some decent numbers and the broad outlook statement is positive.

The company deals in measurement, analytics and assurance solutions for “next-generation” devices and networks. Its products, services and information solutions target high-speed Ethernet, positioning mobile network infrastructure markets, service assurance, cybersecurity and 5G. To me, that looks like a decent niche to occupy in today’s markets.

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No impact from COVID-19 (yet)

In today’s report, the company fleshed out its coronavirus plan. Measures are already in place to protect staff, such as working from home and restricted travel arrangements. The firm’s suppliers are “in the vast majority” dual sourced, which should reduce some of the risks to the supply chain process. For now, the company doesn’t think there will be a financial impact for its business, but the directors plan to “analyse potential implications and implement government guidelines as the situation evolves.”

Meanwhile, revenue came in almost 5.6% higher in 2019 compared to the prior year and adjusted earnings per share shot up by just over 23%. The cash balance rose by almost 51% to just over £183m, boosting the firm’s cash-rich credentials. There’s no doubt Spirent has been trading well. Order intake, for example, rose by just over 13% in the period, to £532m, which bodes well for future trading.

The directors were bold with the total shareholder dividend for the year and increased it by 20%. They said in the report they are “confident” Spirent will see steady, profitable growth in 2020. And they expect revenue to grow by a mid-single-digit percentage.

Building earnings visibility

The firm reckons 5G is an important driver for the business, with customers using Spirent to help them develop, deploy and secure their 5G infrastructure and network equipment. And in 2019, revenue, earnings and cash flow were strong because of the momentum in high-speed Ethernet sales and the US government’s appetite for the company’s “GNSS positioning solutions.”

Looking ahead, the directors are focused on increasing visibility and decreasing cyclical risks in the firm’s portfolio. That’s music to my ears because I’d much rather invest in a defensive company than a cyclical one. And Spirent aims to achieve that goal by expanding its services and software offerings. One positive development is that the increased order intake includes more large, multi-year contracts, which should lend greater stability to future cash flows.

I like the look of Spirent, but it isn’t cheap. With the recent share price near 223p, the forward-looking earnings multiple for 2020 sits at almost 21, and the anticipated dividend yield is just below 2%. Indeed, the stock has run up by about 135% since the beginning of 2018. However, I’d be keen to buy some of the shares on dips and down-days.

A top stock with enormous growth potential

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Kevin Godbold has no position in any share 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.