Yahoo Finance This stock is still undervalued despite a 17pc rise since our tip. Keep buying
Britain’s unloved stock market provides an opportunity to buy fast-growing global companies at bargain prices. London’s deep unpopularity, apparently caused by this country’s potent mix of above-target inflation, restrictive monetary policy and the very real threat of recession, has made valuations exceptionally low.
While this may be understandable for domestically focused companies that face a challenging operating environment at home, a substantial number of FTSE 350 stocks generate the majority of their sales abroad.
In Questor’s view they are being grossly undervalued by investors who mistakenly focus on their listing location rather than on their prospects, and therefore offer excellent long-term capital return potential.
The FTSE 250’s Spectris, for example, generates just 4pc of its revenues in Britain. The precision instruments, hi-tech equipment and software company, which provides data and insights to other businesses, generates 27pc of its sales in America, where annualised economic growth was almost 5pc in the third quarter of last year.
Given that America’s central bank expects to cut interest rates by around 0.8 percentage points to 4.6pc this year, the prospects for companies that operate in America look upbeat.
Sales in China, meanwhile, represented 18pc of the company’s total revenues in 2022. While the country’s near-term prospects are uncertain amid a period of modest deflation, it nevertheless offers a more attractive long-term growth outlook than Britain.
The IMF expects China’s economy to grow by 4.6pc this year versus growth of just 0.6pc in Britain. Spectris’s recent trading update highlighted its strong performance in the fast-growing economies in which it operates. Third-quarter revenues rose by 11pc on a like-for-like basis, while year-to-date sales were 16pc higher.
Such rapid revenue growth has not been achieved by sacrificing profitability; the company reported further progress on operating profit margins after a rise of 1.8 percentage points to 14.5pc in the first half of the year. It now expects to deliver full-year profits in the upper half of its guidance range and to improve margins further in the next financial year.
Its strong order book, meanwhile, provides a degree of visibility and stability not currently commonplace among London-listed companies.
Separately, the business completed four acquisitions during the third quarter for a total of £58m. It has the financial means to continue its acquisition spree, as net cash of £164m at the time of its third-quarter update highlighted.
Its solid financial position also provides scope for a return of cash to shareholders. The company is in the process of completing a share buyback programme following the end of a £1.2bn portfolio rationalisation plan that began around five years ago.
In Questor’s view, a share buyback programme is well timed. Although the shares currently trade at around 18 times forecast earnings, which may not necessarily scream “bargain” to potential investors when other FTSE 250 stocks have far lower earnings multiples, its rate of profit growth means it offers good value for money.
In the first half of its most recent financial year, for example, earnings per share increased by 55pc. Improving cash flow provides scope for greater investment in research and development, which should enable the company to remain competitive in its key markets.
Since we tipped Spectris as a buy in November 2022, the share price has risen by 17pc. This represents a 13 percentage point outperformance of the FTSE 250 index.
While this is an encouraging performance, that relatively short period has not provided sufficient scope for the stock to fully deliver on its potential.
Unearthing companies that have net cash, a clear competitive advantage, margin growth potential and an attractive valuation based on their growth prospects is a tough task in any market conditions.
Allied to this, Spectris’s diverse geographical exposure, improving cash flow and strong order book provide additional reasons for investors to remain upbeat about its prospects.
Of course, how long the pricing anomaly among global companies that happen to be listed in Britain will last is unknown. History, though, suggests that it will be little more than a temporary phenomenon. Keep buying.
Questor says: buy
Ticker: SXS
Share price at close: £35.25
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