When firms report to the market, we have good opportunity to find out whether they are worth an investment.
Today, half-year results are out for test & inspection service provider Intertek Group (LSE: ITRK) defence industry supplier Ultra Electronic Holdings (LSE: ULE) and financial software company Fidessa Group (LSE: FDSA).
Bouncing back
Fears about a weak oil price environment dragging on Intertek Group’s profitability seem over-blown. The shares were weak during 2014, but look perky this morning, perhaps indicating the path of least resistance may now be ‘up’.
Compared to a year ago, the firm’s fist half saw revenue rise 3.5%, adjusted cash from operations grow 14.4%, adjusted earnings per share up 6.7%, which all helped a 6.3% hike in the dividend.
Such figures don’t come from a firm on its knees. The directors reckon the global testing, inspection and certification market will continue to benefit from exciting growth prospects driven by what they describe as global trade flows, global demand for energy, expanding regulations, more complex supply chains, technological innovation and increased demand for higher quality and more sustainable products.
Those buying near the bottom of the 35% or so retreat in the share price since the heady peaks reached during 2013 look vindicated by these results. Yet it’s not too late to run your analysis on this quality business — perhaps after waiting for today’s results-induced spike to subside.
Pedestrian
It’s a different story from Ultra Electonics Holdings where most financial performance figures are a bit down. The firm’s chief executive reckons the results reflect a generally lower level of activity across most parts of the company’s government related business, with the effect increased by a pause in normal business due to the UK and US election cycles.
The firm expects better results in the second half of its trading year according to the traditional weighting of its income. However, City analysts following Ultra Electronics expect a 2% earnings contraction for 2015 overall.
Defence suppliers are often touted as ‘defensive’ investments, because of the consistent nature of cash flow. In fairness, the directors did hike the payout by 4.5% with these interims. Yet, at today’s share price of 1747p, Ultra Electronics yields just 2.8% for 2016 and the firm’s five-year share price record is pedestrian. There’s nothing here to excite me, so I’m avoiding the company’s shares.
Highly rated
With revenue rising 3% and profits falling 3%, Fidessa Group’s share price drop this morning seems like an adjustment of expectations — the shares had risen a fair bit leading up to today’s interims.
Fidessa’s strong niche serving the financial industry has seen the firm grow steadily and the share price rather more recklessly. Today’s forward price-to-earnings rating around 25 looks rich set against City analysts’ expectations of an 8% uplift in earnings during 2016. So, when investor expectations are high, any wobble on earnings growth can cause volatility in the firm’s share price, as we are seeing today.
The chief executive reckons the firm’s customer markets are starting to enter a new phase of recovery as regulatory and structural changes begin to take effect. More regulatory change results in more opportunities for Fidessa and a strengthening pipeline of business. However, he offers a warning that competition within the industry is increasing, which could lead to further closures and consolidations. There could be stronger headwinds during 2016.
