IMI (LSE:IMI) is a UK-based engineering company, listed on the FTSE 250. The full name, Imperial Metal Industries, gives a better hint at the operations of the business. The IMI share price has seen fantastic performance, having doubled over the past year. Today, it rallied another 11% to 1,550p on positive news. Is this the end of the rally, or can I buy shares now to benefit from further growth?
What does IMI do?
IMI operates three main divisions. These are precision, critical, and hydronic engineering. The precision arm is the largest of the three, generating around 50% of revenue last year. In plain English, the business designs and makes valves, pressure monitoring controls, flow control devices, and other heating/cooling systems. This is for a variety of end users, including in the medical, rail, and automation fields.
In comparison to the tech companies that get a lot of the limelight, IMI is what I’d call an old-fashioned engineering company. The products it manufactures gets sold, and the engineering solutions get paid for. One of the elements I like about this structure is that it’s easy for me as an investor to look through documents and understand where the money comes in and where it goes out.
The IMI share price has done very well over the past year. It doesn’t surprise me that an engineering firm like IMI hasn’t been massively impacted by the pandemic. In fact, 2020 adjusted profit before tax was up 9% versus 2019. This is one reason why I think the share price has offered impressive returns.
Another reason I think the IMI share price is up in the long term is due to the profit margins. This came in at 17.3% in 2020, and the company expects it to be in the region of 18%-20% for this year. That level of margin is healthy, and helps it to ensure that the bottom line is green at the end of the year. Investors likely have seen this, and are confident to buy in for the long term.
The IMI share price spike
In the short term, the IMI share price spiked 11% yesterday following a positive trading update. Revenue was up 7.7% in Q1 2021 on the same period last year. The update spoke of “strong performance in the first quarter across all three divisions and the improving trends in our major end markets”. Profitability for the full-year 2021 was also upgraded.
I think the IMI share price jumped so high on this news because it’s quite early in the year to be calling such strong performance out. Usually upgrades or downgrades to annual performance are done in Q3 or later. Calling it out now is bold, and very positive.
I do see a risk that could prevent the rally from continuing. The business is still going through a restructure, and the costs for 2020 (£39m) exceeded the benefits (£30m). It does expect a net benefit in 2021, but I’m a little concerned about the ongoing high costs involved here.
However, given my bullish long-term reasons mentioned above, I do this the rally could continue and so am considering buying in.
