Morgan Advanced Materials (LSE: MGAM) released a positive trading update on 4 November. And I’ve identified it as one of two stocks to buy for my portfolio. However, right now I have no spare cash but plan to revisit both these opportunities soon.
Morgan makes “technologically demanding” products from carbon and ceramic materials. For example, firebricks, heat shields, carbon brushes, terminal blocks, ceramic cores, crucibles, seals, bearings and many other things. And, in the nine months to 30 September, organic sales rose by almost 11% year-on-year as measured in constant currency rates.
Trading ahead of expectations
Looking ahead, the directors raised their guidance for full-year organic constant-currency revenue and for adjusted operating profit. And City analysts have pencilled in an uplift in earnings of almost 20% for the year.
Chief executive Pete Raby said the company is delivering “robust” revenue growth and improving profitability “despite the challenging environment.” And the effects of inflation are being “more than offset” by improving operations and by adjusting selling prices.
Meanwhile, with the share price near 302p, the valuation looks undemanding. The forward-looking earnings multiple is below 10 for 2023 and the dividend yield is well above 3%.
However, the company has a patchy multi-year record of revenue and earnings. And the dividend anticipated for 2023 is still a little below what the company paid in 2016. So I reckon the business has a history of struggling to maintain a positive growth trajectory. And that’s probably because the operations are vulnerable to cyclical influences affecting the wider economy.
Nevertheless, despite the risks, I’m tempted to buy the stock to hold for the long term. But I’m also keen on another company operating in the industrial sector, Bodycote (LSE: BOY).
This business provides services in the areas of heat treatment, metal joining, surface technology and hot isostatic processing. And its customers include enterprises in general industry and sectors such as aerospace, defence, and automotive.
Beating inflationary pressures
A trading update released on 18 November declared “strong” revenue growth on track to meet expectations. The report covers the period from 1 July to 31 October, and it shows revenue at constant currency rates increased by 22% year-on-year.
However, the figure includes selling price increases and energy surcharges charged to customers of around 15%. But I think the way the firm has passed on its costs is encouraging and shows the resilience of the business in the current inflationary economic environment.
City analysts expect a double-digit percentage increase in earnings during 2023. And with the share price around the 590p level, the forward-looking dividend yield is running just below 4% for 2023.
But Bodycote has a robust multi-year record of raising its dividend by annual increments — even through the pandemic. And I think the firm’s financial history underlines the strength of the business.
However, despite my enthusiasm for the business, the stock has travelled essentially sideways over the past decade. And part of the reason for the lacklustre performance could be patchy earnings and a cycling valuation.
Nevertheless, the company tempts me now.
