At the end of April, flow control and instrumentation specialist Rotork (LSE: ROR) issued an encouraging trading update. I think it’s a top UK stock for me to buy now.
For context, the company scores well against quality indicators. For example, the operating margin is running just above 20%. And the business is delivering a return against invested capital of a little over 19%. I’m also keen on the small net cash position on the balance sheet. And I like the company’s long, multi-year record of steady revenue, earnings and cash flow.
Why I think Rotork is a top UK stock
In short, Rotork strikes me as a quality operation. And the business traded well through the pandemic. Meanwhile, in the April update, the directors confirmed that activity “continued to improve” in the first quarter of 2021. So, that’s two ticks on my stock-picking checklist. A quality set-up, and an improving business.
Like many companies, Rotork has been seeing rising input costs, such as raw materials, commodities and logistic services. But commodity cost inflation will likely be offset by the company’s selling price increase applied in January. And the ability of many businesses to raise their prices is why I reckon stocks can be a decent asset to hold when inflation bites. Rotork also applied temporary surcharges to some delivery routes to mitigate the higher logistics costs.
The directors reckon the firm’s ‘Growth Acceleration Programme’ is on track. And as part of the plan, 2021 should see progress towards supply chain optimisation and an IT solutions roll-out. Meanwhile, the directors reassured shareholders the business “continues to be highly cash generative.” And the net cash figure on the balance sheet stood at almost £191m on 4 April, up from just over £178m on 31 December 2020.
The strength of Rotork’s cash performance is great news for shareholders because the directors decided to pay the dividend for 2020. So, despite the pandemic, the company hasn’t missed a single dividend payment. And I think a firm’s dividend record speaks volumes about the strength and resilience of a business.
A positive outlook
Looking ahead, the directors reckon the business is strengthening and they see Rotork as “well-placed” to benefit from recovering demand. City analysts expect earnings to increase by a high single-digit percentage in both 2021 and 2022. That strikes me as a decent rate of growth. However, the company could miss those figures if the world economy turns downwards again. And I’d then likely lose money on the shares.
Meanwhile, Rotork carries a full-looking valuation. With the share price near 349p, the forward-looking earnings multiple for 2022 is just above 25. Perhaps there’s an elevated risk in a valuation that high. However, higher valuations can remain in place for years and act as a marker of quality.
I’m bullish about the world economy and Rotork’s prospects. So I’d be inclined to invest £2,000 in the shares today with the aim of holding for at least five years. Although a positive investment outcome isn’t certain or guaranteed.
We’ll find out more about the company’s progress with the half-year results due on 3 August.
