British engineering a thing of the past? Don’t you believe it. Sure, the sector has had a couple of years in the doldrums. But if we look to the longer term, I see some solid investments.
Great old name
Shares in Ricardo (LSE: RCDO), the engineering company founded by Sir Harry Ricardo in 1915, climbed 10% to 875p this morning after an impressive set of full-year results — and they’re now up 22% since their post-referendum dip.
With an order intake of £361m (up from £252m in 2015), Ricardo saw revenue rise by 29% to £332.4m, with underlying pre-tax profit up 41% to £37.7m and EPS up 30% to 55.2p. The dividend was lifted 9% to 18.1p per share, to provide a modest (but progressive) yield of 2.1%.
Forecasts have suggested a 7% fall in EPS for next year, but those were before today’s big rise was revealed and I expect to see an upward rerating now. We’re probably looking at a forward P/E of around 15, so does that indicate a bargain? I think it does, for a couple of reasons.
Ricardo is well diversified, with chief executive Dave Shemmans summing it up: “Our mission at Ricardo is a simple one: to play a major part in solving the world’s big issues around transportation, pollution, climate change and the efficient use of scarce resources such as oil and water.” I always like a company with modest ambitions!
He also spoke of “our strategy to build long-term, multi-year contracts and relationships,” and that ties in very firmly with my own long-term approach to investing. I expect Ricardo’s share price to be significantly ahead in another five years.
Better than BAE?
BAE Systems (LSE: BA) shares have been flat over the past 18 months, standing at 549p. And though they’ve almost doubled over the past five years, over 10 years we’re only looking at a 42% gain. Still, with dividends steadily providing an extra 4% to 5% a year, that’s still beaten the pants off a savings account.
Are the shares on the verge of another bull run? I think they could be. Firstly, BAE has relatively little net debt — it stood at a bit over £2bn at the interim stage on 30 June, and that’s nothing compared to sales of £8.7bn and an order backlog of £36.3bn. So it’s in a strong position to invest in growth as the defence business picks up.
BAE is also a solid payer of dividends, with yields consistently ahead of the Footsie average — and they’re well covered, progressive, and safe. Analysts have been upping their forecasts over the past 12 months too, and they’re putting out an impressive buy consensus these days.
BAE’s income is variable in the short term, being based on long-term contracts and relationships (just like Ricardo’s). And that, coupled with this Brexit thing, makes me feel the short-term bears have been ruling the share price of late. But I see confidence improving, and I expect the long-term view to prevail (as it always does in the end).
So I see a good few years ahead for BAE shareholders too, though on balance I’m drawn to the fact that Ricardo doesn’t rely on the defence sector. If I had to choose one, it would be the smaller cap Ricardo with what I see as greater medium-term growth potential.