The shares of ceramic products manufacturer Churchill China (LSE: CHH) look perky today on the release of the firm’s full-year results. That’s not surprising because the figures are good. Revenue rose 7% compared to the year before, cash flow from operations lifted almost 8% and adjusted earnings per share shot up 26%.
The company has been a big growth success story over recent years, but I can remember in the early years of the century the share used to pop up on value filters because of its poor growth outlook and low valuation. How times have changed! Over the past five years, earnings have increased by more than 160%, the dividend is up nearly 100% and the share price has soared more than 200% higher.
Five years of stunning growth
What a great investment Churchill would have been if you’d bought the shares on value grounds in, say, 2005 and simply held on until today. But it’s hard to pick value winners that go on to transition into growth. I reckon some value shares go the other way and cause investors to lose money.
But Churchill has grown its business well, expanding into Europe, America and to other countries. In 2018, 40% of overall revenue came from the UK market, 37% from the rest of Europe, 12% from North America and 11% from the rest of the world. Chairman Alan McWalter said in the report that the business and financial performance in 2018 exceeded the directors’ expectations and the new year has “started well.” Management expressed confidence in the outlook by pumping up the total dividend for the year by 18%.
The company’s revenues from export rose 17% in the period. Churchill has come a long way since its origins as a regional potter more than 200 years ago. McWalter explained in today’s narrative that the company has transformed itself over a long time period. The business “has developed substantially over the last five years,” and sales to Hospitality customers have increased from £32.7m to £52.4m “at a compound annual rate of almost 10%.” The export story is impressive, I reckon. Over five years, trade overseas has risen from 39% to 60% of the firm’s business. On top of that, McWalter explained that the proportion of hospitality revenue from “added value products with higher margins” has increased from 10% to 44%, which has driven the operating margin up from 8% to more than 16%.
More to come?
I’d always considered Churchill to be a cyclical business. It seems likely that trade in hospitality tableware would fluctuate along with prevailing general economic conditions. But I can’t deny that the company has delivered barnstorming growth within its cyclical sector. Looking forward, McWalter acknowledged that the trading environment in the UK is “subject to increased uncertainty,” but he said he believes the company has “a robust business model” and the directors will continue to aim for growing the export market.
City analysts following the firm are predicting single-digit percentage increases in earnings ahead. Meanwhile, the forward-looking price-to-earnings ratio is running just above 18 for 2020. It seems that Churchill has moved from a value rating to a growth rating over the years, and I reckon we could see a lot more expansion in operations ahead.
