With sterling dropping faster than Donald Trump’s opinion poll ratings, how can private investors protect themselves? One solution would be to seek out UK-listed companies that generate a good proportion of total revenue overseas. After all, any drop in the pound makes their goods more attractive to foreign buyers as the latter need less currency to buy the same quantity.
With this in mind, let’s take a look at two prime candidates.
Go with the flow
FTSE250 constituent, Rotork (LSE: ROR) is a market leading actuator and flow control company. In other words, its products are needed wherever gases or liquids are managed. In addition to its four divisions (Controls, Fluid Systems, Gears and Instruments), the £1.9bn cap also provides “worldwide planned and emergency actuation services including: actuator overhauling, health checks, retrofit, preventative maintenance and extended scope projects”.
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After a tricky couple of years, Bath-based Rotork’s shares have enjoyed a resurgence of late, no doubt helped by a recovery of sorts in the oil price. Despite boasting an excellent history of returns on capital and solid operating margins, the company’s shares could be purchased for as little as 155p when oil hovered around the $30 mark back in February. They start today at 221p, underlining the importance of buying quality companies when others are deserting them. But does this mean investors have missed the boat?
With a forecast price-to-earnings (P/E) ratio of just under 23, Rotork’s shares might not seem cheap but, as mentioned in a previous article, the P/E should only be regarded as a starting point when it comes to scrutinising a company’s investment case. Although net debt has increased in the past couple of years, Rotork’s balance sheet looks strong. Recent levels of free cashflow have also been higher than earnings, suggesting that the company is turning into something of a cash machine for its investors.
Should the oil price recover further, I wouldn’t be surprised to see Rotork’s shares return to and rise above their 2013 peak of just under 300p. Factor-in our impending departure from the EU and the fact that Rotork exports a lot of what it produces and the company looks like a solid pick. While unlikely to attract income-hunters, a well-covered yield of 2.3% is nevertheless welcome, particularly in these low-rate times.
Pump up your portfolio
Engineering peer Spirax-Sarco (LSE:SPX) is actually two businesses. One is the eponymous world leader in the design, manufacture and provision of steam and thermal energy management solutions. The other, the Watson-Marlow Fluid Technology Group, specialises in producing mechanical pumps and associated fluid path technologies.
Like Rotork, Spirax has an excellent history of high returns on capital (consistently above 20%). Operating margins are also superb relative to the market as a whole. The company’s net cash position is yet another positive, particularly for those investors who like to avoid adding heavily indebted companies to their portfolios. Factor-in Brexit and the performance of the company’s shares in recent months makes perfect sense.
Spirax’s shares have jumped over 30% since June, making them even more expensive than Rotork’s on a forecast P/E of almost 26. While sterling’s plight may already be reflected in this price and today’s yield of around 2% isn’t anything to shout about, I can’t see investors abandoning the company in a hurry.
