Improving outlook

Global provider of engineered electronics, TT Electronics (LSE: TTG), released an upbeat update. Trading for the four months to the end of April has been in line with expectations. Revenue has risen by 10% versus the same period of the prior year, while it is 1% higher on an organic basis.

Encouragingly, the company’s order book is strongly ahead of the previous year. This provides the business with better visibility over the medium term. It also indicates that the strategy to reposition the business in structural growth markets where there is increasing electronic content is working well.

The acquisition of Cletronics in 2017 provides TT Electronics with further capabilities in North America. This should help to improve its earnings growth outlook. In fact, in the current year the company’s bottom line is expected to rise by 13%. Next year, further growth of 10% is forecast, which could lead to improving investor sentiment.

Since TT Electronics trades on a price-to-earnings growth (PEG) ratio of only 1.3, it appears to offer a wide margin of safety. This could limit its downside risk in the short run and lead to a higher level of capital gain in the long run. As such, now could be the perfect time to buy it.

Better-than-expected performance

Also reporting on Friday was designer and manufacturer of microwave electronic products, Filtronic (LSE: FTC). Trading during the fourth quarter of the year in the Wireless business was better than previous guidance. While impressive, some of this was offset by short-term weakness in trading in Broadband. However, when the performance of the two segments is combined, the company’s management now expects total revenue to be around £35m in the year to the end of May 2017.

This better-than-expected top-line performance has caused the company’s share price to rise by 30% on the day of its update. It is also expected to boost profitability in the current year. Filtronic’s earnings are due to rise by 225% in financial year 2017, followed by further growth of 17% next year. This puts the company’s shares on a PEG ratio of just 0.5, which suggests they offer a wide margin of safety, despite their improving outlook.

Clearly, Filtronic is a relatively small company which lacks the size and scale of many of its larger peers. As such, it could prove to be a relatively risky buy. However, with high potential rewards, its risk/return ratio suggests that now could be the right time to buy it.

Could this designer and manufacturer of sophisticated electronic components and subsystems for the communications and defence industries now offer better potential returns for investors than blue chip BAE Systems (LSE: BA)?

Business performance up, share price down

Filtronic posted revenue of £21.6m for the six months ended 30 November compared with £4.5m for the same period in the prior year. Pre-tax profit came in at £1.7m compared with a £4.3m loss, and the company moved to a net cash position of £0.8m from net debt of £0.3m.

Despite the strong business performance, Filtronic’s shares are trading 14% down today at 11.75p, as I’m writing.

Lumpy orders

The company cautioned that the phasing of order fulfilment has been significantly biased to H1 and that revenues are expected to be lower in H2. Furthermore, it added: “We are likely to see ongoing short-term volatility in our revenues and profitability”.

However, the lumpiness of orders is something the market should already have been aware of. In the last financial year, four customers accounted for 74% of revenue and in the latest six months, just two customers accounted for over 85%.

The company is well aware of the undesirability of being reliant on a limited number of customers and is working hard to further widen its product and customer base, for which it says it has a “growing opportunity pipeline”.

Higher risk/reward buy

Clearly, Filtronic remains a higher-risk investment but the rewards could be substantial if the company meets the growth that’s forecast by the house broker. This would see a current-year P/E of 23.5 fall to just 9.8 next year.

I see Filtronic as an appealing buy for investors with a higher tolerance for risk and my view is shared by a number of notable small-cap institutional investors whose names grace the shareholder register.

Core buy

Of course, BAE Systems is a Goliath compared with Filtronic. It’s expected to report revenue of £18.6bn for 2016 when it posts its annual results next month and its order book stood at £36.3bn at the last reckoning,

The company’s shares rocketed on the result of the US Presidential Election in November with the expectation that Donald Trump will ramp up military spending. Despite the rise, it remains reasonable value, trading on 15 times expected earnings for 2016 at a current share price of 586p. Unlike Filtronic, the FTSE 100 firm pays a dividend with the yield standing at a respectable 3.6%.

Bottom line

Due to its size, diversification and record of steadily increasing dividends, BAE is a more secure investment than Filtronic. Indeed, I would class it as a core buy for a portfolio.

Meanwhile, Filtronic could produce tremendous capital gains but must deliver on its encouraging — but not guaranteed — opportunity pipeline if it’s to do so.

However, IMI expects an improved performance in the second half of the current year, with cost-saving initiatives and business improvement measures set to have a positive impact on the company’s performance. Despite this, IMI is still forecast to record a 17% fall in its bottom line this year. As such, investor sentiment could decline and put the company’s share price under a degree of pressure.

Looking ahead to next year, IMI is due to bounce back with growth of 10% in its net profit. This puts it on a price-to-earnings-growth (PEG) ratio of 1.6 and indicates that while it’s experiencing a tough period, for long-term investors, IMI could be a sound buy with 20% upside.

Strong order book

Also reporting today was Costain (LSE: COST), with the engineering solutions provider having its AGM and updating on recent progress. It remains on track to meet previous guidance and with a record order book, it seems to be well-placed to deliver strong growth over the long term.

With Costain expected to increase its bottom line by 6% this year and by a further 14% next year, it seems to be performing well. And with it having a high degree of earnings visibility due to the aforementioned high level of orders, it could prove to be a relatively low-risk play. Furthermore, with Costain trading on a PEG ratio of only 0.7, it offers 20%-plus capital growth potential over the coming years. Its dividend yield of 3.8% also has huge appeal – especially since dividends are covered more than twice by profit and could therefore rise at a rapid rate.

Contract win

Meanwhile, shares in Filtronic (LSE: FTC) have risen by as much as 30% due to the announcement of a new contract win. The designer and manufacturer of microwave electronic products for the wireless telecoms infrastructure market has received further substantial production orders for its new range of integrated antennas from a major European OEM. The orders are valued at over $24m and are follow-ons to previously announced orders of $13.8m.

Clearly, this is excellent news for Filtronic and shows that market acceptance of its new antenna products is increasing. Although it remains a relatively small and high risk stock which is difficult to forecast since demand for its products is subject to uncertain changes to market demand, Filtronic could be worth a closer look for less risk-averse investors and may rise by another 20%.

Clearly, this is excellent news for the company and has been warmly received by the market. However, the company’s shares are still down by 45% in the last year and with Filtronic being a loss-making entity in each of the last two years and remaining in the red in the first half of the current year, investor sentiment could come under a degree of pressure in the near term.

Despite this, Filtronic is progressing through a major restructuring and could return to profitability over the medium term. However, it may still be prudent to await further updates regarding its financial performance before buying a slice of it.

Also rising by more than 10% today are shares in Angle (LSE: AGL). The specialist medtech company has stated that the results of Barts Cancer Institute’s ongoing work with its Parsortix liquid biopsy system have provided evidence in support of the use of Parsortix in the detection and assessment of prostate cancer.

In fact, the Parsortic system may assess the aggressiveness of prostate cancer through a simple blood test, which is crucial since it means that men with low level disease could avoid unnecessary and potentially harmful solid biopsy and surgical intervention. Similarly, men with an aggressive form of the disease could be fast-tracked for further investigation and treatment.

Clearly, this is good news for Angle and opens the potential of another highly differentiated liquid biopsy application for Parsortix in a key area of medical need. As such, the company’s shares could continue to rise and while they remain relatively high risk, they may be of interest to less risk averse investors.

Meanwhile, shares in ReNeuron (LSE: RENE) are also among the top risers today. That’s despite there being no significant new flow having been released by the company, although the stem cell therapy company may still be benefitting from improving investor sentiment following its positive news flow of last week.

This was where the first patient had been treated with its cell therapy candidate for a disease which causes blindness called retinitis pigmentosa. It marks a significant milestone for the company, partly because it marks the commencement of clinical development activities in the US, which could become a major market for ReNeuron. And while the outcome of the trial is clearly a known unknown, there is the potential for ReNeuron to continue to deliver the share price gains of the last three months, where is has risen by around 20% due in part to gradually improving investor sentiment.