2018 is set to be a landmark year for engineering technology company Aveva (LSE: AVV) following its amalgamation with Schneider Electric SA’s industrial software business in March.
Analysts are expecting big things from the enlarged group this year and it seems that the firm is on track to meet these expectations looking at the trading update issued this morning.
Strong trading
Trading was “strong” for heritage Aveva, thanks to the improving oil and gas market outlook, which resulted in revenue expanding during the second half of last year.
Overall for the year, revenue increased at a “comfortable” double-digit rate on a currency neutral basis, with growth at 5.9% for the first half. Meanwhile, the update notes the heritage Schneider business also did well, recording low single-digit revenue growth on a currency neutral basis.
For the full-year, analysts are expecting the company to report earnings per share growth of 19.6%, although growth is expected to slow to just 4% year-on-year for 2019.
Looking at these figures, it’s difficult for me to get excited about Aveva and the company’s prospects. Indeed, even though the stock has outperformed the FTSE 100 by 7% over the past month, I’m finding it difficult to see how these gains can continue. The shares currently trade a forward P/E of 28, which looks expensive even when you factor in the earnings growth predicted for the next two years. And the firm is about a fifth more costly than the broader UK IT sector. A dividend yield of 1.8% also leaves a lot to be desired.
With this being the case, I would avoid Aveva. On the other hand, I believe specialist engineering consultancy group Ricardo (LSE: RCDO) could be an excellent buy for your portfolio.
Growing backlog
Like Aveva, shares in Ricardo have smashed the FTSE 100 over the past few months returning 10% year-to-date, compared to -5% for the UK’s blue-chip index. But unlike Aveva, the stock is much more attractive on a valuation basis. The shares currently trade at a forward P/E of 15.7, and earnings per share are expected to rise by more than 25% over the next two years.
And as my Foolish colleague Ian Pierce recently pointed out, Ricardo’s international diversification across different sectors should help the firm continue to grow no matter what the economic environment. Within its half-year report, the company reported order book growth of 24% year-on-year to £302m against revenue for the half of £183m. Long term contracts guaranteed income for many years and make it more likely that the group will be able to book recurring revenue from customers in the years ahead.
As well as organic expansion in sectors such as rail, defence and energy, the company is also using its strong balance sheet to buy up growth via bolt-on acquisitions. There’s plenty of capacity for further deals with net gearing of only 19.2% and a cash balance of £34m.
All of these positive factors lead me to conclude that Ricardo is a much better buy than Aveva.
