Just taking another look at Renishaw. A company at the forefront of metrology (the science of measurement) and serving major industries such as Aerospace; Automotive; Science; and Medicine.
The company released a 3rd quarter interim statement yesterday which seems to further underline the company's recovery that was initially highlighted in their 2nd quarter statement in January and led to a significant 1 day jump in the shares.
Highlights were:
- Revenue of £75m up some 60% on last years 3rd quarter
- £32m of sales in March alone
- sales up 95% in the 9 months year to date
- net cash balance of £35.3m
- significant demand from the Far East and China
- forecasting profits slightly ahead of expectations.
One has to remember that the comparables are weak having just come through the recession of the last few years.
But, if it was my company I would be looking to surprise on the upside so by modestly stating "slightly ahead" will the company now proceed to delight the city and its shareholders!
Looking back Renishaw ploughed a trough of 273p in March 2009, as its global markets imploded in the aftermath of the credit crunch, but has since made a steady recovery that has begun to accelerate over the last 6 months and the share price now stands at 1650p.
Management took some tough decisions to survive that period and to their credit the workforce appear to have supported them.
Recruitment is also worth noting with the company's headcount having increased by 285 to 2384 and there are a further 293 vacancies to fill.
In March 2009, the company released 500 of its then 2240 staff.
Similarly, with strong activity levels being seen in its markets the company has also increased its working capital/ inventory.
There is an obvious risk in this jump in headcount and inventory but the company can only plan/invest in what it has confidence in, and the rest is down to capable management.
Has the company got capable management? It seems so to me: the company has grown strongly; tough decisions have been made in the last few years; and the company does have a level of prudence in its accounts.
Cash balances are increasing and there are no "borrowings" showing in the balance sheet. There are increasing liabilities but these are not shown as borrowings and no interest payments are running through the profit and loss.
However, other liabilities (both current and non-current) are increasing and it would be useful to understand what they are and the risk that they pose should they be called in.
The 2 founders: Sir David McMurtry (Chairman and CEO) and John Deer (Deputy Chairman) retain a strong majority stake in the business and it could be that they themselves are the "other liabilities".
Like one or two other companies, Renishaw is an essential to the markets its serves but by the same token when those markets contract, Renishaw also suffers. In this way it is often seen as a gauge to recovery in those markets and sectors it serves as investment in capacity generally comes before customers can increase production to meet global demand.
As a result, one can often "speculate" the future based upon optimism in the global economy in much the same way as commodity prices are based upon "speculated" future demand from such as China and India. Increasing demand against supply limitations pushes the price up as it does with any "marketplace".
Charter International, with its leading ESAB welding and cutting business, is in a similar category if not quite at the same level of uniqueness as Renishaw. In the case of both companies, any expectation of recovery and growth in their global markets will significantly boost the speculated "prospects" for profits and the share price.
The reason for my talking speculative is to highlight the risks involved as at 1650p the company is on a forecast Price/Earnings of 19.5 times and that itself is in expectation of a profit increase of 166%.
Renishaw has generally been a desirable, high flying company so I wouldn't be too concerned (or too excited) about the forecast 166% increase in profits (due to the weak comparables) however, looking at a different comparable, a 166% jump in profits would be approx. double the levels achieved in 2006 and 2008.
But, with 9 months of the current financial year now accounted for the company is giving guidance that it will slightly exceed expectations!
Looking beyond the current financial year, it depends where you believe the global economic recovery is.
China, India, US, UK, Japan, and Aerospace, Automotive, Scientific, and Medical; are all recogniseable high growth sectors and regions that have, and will drive economic recovery and Renishaw's prospects.
At 1650p, and a P/E of 19.5, recovery and current year profits growth would appear to be priced in but what happens beyond that?
The current consensus if for a 12% increase in profits for the year ending 2012.
I would suggest that this in itself is not enough to support the share price at these levels, but also speculate that the company has the potential to exceed this as customers re-invest and replace older technology.
Renishaw is in a unique position of rendering its own technology obsolete as it develops new ones. As one would expect, It maintains ongoing support for its technology but eventually replacement/updating is required.
However, the key factor is whether there is enough global demand to ensure that customers "invest" in new capacity and/or replacement.
So lots of speculation beyond the current financial year but Renishaw's recovery does potentially give a strong indication as to where the global economy is in its recovery cycle.
If investment in capacity/replacement is taking place at a significant level in the markets Renishaw serves then these industries could have turned a significant corner in their own recovery and are potentially stepping up investment to meet an anticipated increasing demand.
As to Renishaw as an investment, it is a desirable company for me with patented market leading technology, and capable management, but I have probably missed out on the opportunity presented over the last 12 months by not recognising the strengths and qualities of the company; and its position as a forerunner in the economic cycle of the markets it serves.
From a growth point of view, the current 2 year picture that I have isn't enough of an enticement either although it is going through its own investment in capacity and working capital which, once supply catches up, might still lead to improvement in its other metrics such as: profit margins; Return on Capital Employed etc.
The threats continue to be around any slowdown from its markets (and China in particular as they combat inflation), or in the timing (and success) of R & D spend which has historically averaged 18% of turnover (2011 forecast turnover is £272m. 18% of which would be £49m).
What I should also have recognised as a strength was its take-over potential should the company not have been able to manage its way through the downturn.
The company's net asset value is only 178.61p per share but it is the unquantified potential and demand for its patented technology, and its in-house manufacture (retained knowledge and capability), where the value really is (but this is speculation again).
In summary then, on a 2 year view and at the current price, an investment in Renishaw wouldn't fit into either: the Value and Income side of my portfolio; or the Growth side.
And, even though I think that Renishaw will continue to grow and maintain their position, they aren't a share for me yet. But, I do also think that the company's recovery is a strong signal that global recovery may be entering a new phase.
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