Many FTSE 250 companies have seen their valuations get slashed in 2022. And Hill & Smith (LSE:HILS) was no exception, with this industrial engineering business seeing its share price tumble roughly 50% by September last year.
But in the last 12 months, things seem to be turning around, with the company’s market cap surging by 61% to the point where it’s almost in line with its 2021 peak levels. What’s going on? And can this upward trajectory continue to climb even higher?
Record numbers, record performance
As a quick reminder, Hill & Smith provides a range of infrastructure services to the UK and US construction sector as well as rail and energy generation industries. But it’s in America where the company seems to be stealing the show.
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With the US government ramping up its spending into renovating its ageing electrical grid infrastructure, Hill & Smith has had no trouble finding work. As such, its Engineered Solutions division saw sales grow by an impressive 33%, with operating profits more than doubling on the back of expanding profit margins.
Similarly, with demand for rust-proof steel rising, its Galvanizing Services segment also achieved double-digit growth. And while underlying earnings only grew by a modest 6%, that was still sufficient to achieve a new record high.
Overall, Hill & Smith’s top line over the first six months of 2023 expanded by 20%. And with underlying operating margins growing from 12.5% to 14.9%, earnings grew at a much faster pace of 43%. Considering the current economic climate, this level of growth, especially for an industrial business, is an impressive sight.
The UK hasn’t fared as well
Considering the rampant growth across the pond, it’s not surprising to see shares bounce back from last year’s correction. However, operations here at home haven’t managed to keep up.
Looking back at the Engineered Solutions segment, UK sales actually shrunk as general spending in the construction sector ground to a halt. Management was able to offset some of this volume decay through higher pricing, but it still resulted in a 4% shrink in sales.
Meanwhile, a further 19% reduction in volumes from British customers was reported in its Galvanizing Services. And a similar story seems to be present for all of the group’s other divisions as well. And management expects these challenges to continue throughout the rest of this year, possibly bleeding over into 2024.
Can the stock continue to climb?
With around 45% of sales stemming from the UK, the slowdown in British infrastructure and industrial spending is having a significant impact on Hill & Smith’s performance. Yet, all of these problems are currently being offset by the strong growth in the US.
So, can the firm continue to expand internationally until market conditions improve at home? In my opinion, yes.
Apart from investing in the national energy grid, the US government has recently passed multiple infrastructure investment bills into law. As such, finding new projects and opportunities shouldn’t be challenging for this enterprise. And with a forward price-to-earnings (P/E) ratio of 16.3 – in line with its five-year average – this growth opportunity looks fairly priced in my eyes.
