Long-term growth stocks can seem forever overvalued. But when they go through an almost inevitable slow spell, it can be a good time to get in.
FTSE 250 firm Renishaw (LSE: RSW), which specialises in precision measuring equipment, is in such a slow spell now. The shares soared to around £58 in January 2019, then reached a similar level again six months later.
But then the rot set in, and despite a positive start to 2020, Renishaw shares are still more than 25% down on their previous peak. There are signs of at least some share price stabilisation, which suggests we might be seeing a buying opportunity.
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But the problem is, earnings are falling as demand for the firm’s products has been slipping. Earnings per share fell 30% in the 2018–19 year, and there’s a similar drop expected for 2019–20.
First half
First-half figures Thursday emphasised the fall in demand from Asia Pacific countries, with revenue down 20%. But revenue slipped worldwide too, down 14% overall to £259.4m at constant exchange rates.
The bottom line shows a big dip in adjusted pre-tax profit, to £14.3m from £59.6m at the same stage in 2018. Adjusted EPS also fell, from 69.3p to 15.1p. But the interim dividend was maintained at 14p per share, with cash of £71.3m on the books.
I see Renishaw as a leader in its field, making high-quality products with strong margins. It wins on cash flow for me too, and I do think the current downturn is transitory.
But right now, on a forward price-to-earnings ratio of over 50 and with earnings that I think might come in well below forecasts, it’s too rich. I think there could be significantly better, and safer, buying opportunities in the future.
Growth return
After a couple of years of falls, analysts are expecting earnings at 3i Group (LSE: III) to return to growth. That’s not until 2021, mind, and they have the year to March 2020 flat.
Dividends have held up and look set to yield around 3.5%, covered more than three times by earnings. We’re looking at a P/E of under nine, and dropping. So why is the FTSE 100 growth prospect so apparently undervalued?
Well, 3i is a private equity and venture capital firm, and P/E is not as meaningful a measure for such an operator. It’s perhaps more helpful to look at net asset value, which stood at 877p per share at 30 September. That’s despite a hit from the strengthening of sterling, making the company look more attractive to me.
Attractive
With the shares trading at 1,110p, it indicates a price to book value of 1.27, which I don’t see as stretching.
During the third quarter, 3i’s private equity arm generated cash proceeds of £189m through several divestments. It also “signed the disposal of Aspen Pumps at an overall money multiple of 4.1x and a 34% IRR.“
The company also spoke of “the highly accretive sale of Wireless Infrastructure Group out of 3i Infrastructure plc and further rail investment in North America.”
3i is, admittedly, a trickier company than many to value. And profits could be more erratic due to the long-term timing of investments and disposals. But I’m seeing a significant long-term growth opportunity, and a cash cow on the dividend front.
