Leading engineering firm

As a quick introduction, Rotork is an engineering business with a focus on designing, developing, and selling valves, actuators, and instruments that are crucial to the flow of gas and liquids through industrial plants. Most of its business is in the oil and gas sectors, however, it also has a presence in water, waste, chemicals, and the nuclear power industry.

So what’s happening with Rotork shares currently? Well, as I write, they’re trading for 240p. At this time last year, the stock was trading for 349p, which is a 31% decline over a 12-month period.

A FTSE 250 stock with risks

Firstly, I note that Rotork shares look a bit expensive on a price-to-earnings ratio of 26. There is every chance that future growth could already be priced in here. On the other hand, could it be a case of a top company trading at a premium price? The old adage you get what you pay for springs to mind here.

Next, Rotork’s exposure to the gas and oil market is a long-term concern. With global initiatives to move towards electric power and green alternatives, could it see performance and returns affected? What sets my mind at ease here is its diversified business model and access to other industries.

The positives and what I’m doing now

So to the positives. I always refer to performance track records and Rotork’s looks impressive to me. I do understand that past performance is not a guarantee of the future, however. Looking back at the past four years, it has recorded consistent revenue and profit for this period. It even recorded positive trading during the pandemic period.

There aren’t many stocks that can say they haven’t cut their dividend since 1988. Rotork can, however. Now I am aware that dividends can be cut or even cancelled at the discretion of the business at any time. Rotork’s current dividend yield stands at 2.6%. This is higher than the FTSE 250 average, which is just under 2%. Consistent and stable returns is something I want all the stocks in my holdings to offer me.

Finally, I am buoyed by Rotork’s growth journey over the past few decades. I can see that it has managed impressive recent performance, which includes high profit margins and returns, as noted above. It also tells me it has the knowledge, experience, and know-how to navigate macroeconomic issues, such as the ones we have experienced in the past two years and counting.

Despite trading for a premium, I’d add Rotork shares to my holdings. Its position in the market, track record of performance and returns helped me make my decision. I will keep a keen eye on developments as the oil and gas market changes, however, and see how Rotork adapts.

Both companies have paid dividends continuously for over 25 years. And both look decent value to me after this year’s market sell off.

Rotork: engineering excellence

Rotork (LSE: ROR) provides the super-reliable valves, actuators and instruments needed to keep gas and liquid flowing safely through industrial plants. The company’s heritage is in the oil and gas sector. But it’s also active in water, waste, nuclear power and the chemical industry.

Rotork was founded in 1957 and listed on the London Stock Exchange in 1968, so it has a fairly long history. Unlike some comparable companies, this firm has also stayed true to its original mission. I see that as an attraction. It suggests to me that Rotork is a market leader in its sector and has probably been well managed over the years.

Challenges ahead?

While I’m confident Rotork has a strong future, I’m aware that the oil and gas market contributed more than 40% of group profits last year. I wonder if there’s a risk that this market could shrink over time, as electric power replaces petrol and diesel.

I don’t know how the future will pan out. But I do know that Rotork has successfully evolved for more than 65 years. I think this business will probably continue to do well.

Its shares aren’t obviously cheap, trading on 20 times 2022 forecast earnings with a 2.8% dividend yield. However, this company has high profit margins, and the dividend hasn’t been cut since at least 1988.

If Rotork can return to stable growth after the disruption of the pandemic, I think the shares could be good value at current levels. Rotork is on my short list to buy.

Savills is my top property pick

Many UK housebuilding stocks offer high dividend yields at the moment. However, I think this could be a sign that the market expecting a housing slowdown.

Instead of housebuilders, I’m looking at buying a different type of property stock for my portfolio. The company I’m eyeing is international real estate group Savills (LSE: SVS).

This £1.6bn firm was founded in 1855 as a London property agent. Today, Savills operates globally. The business provides services to a range of commercial and industrial sectors, as well as wealthy individuals.

The group’s latest update confirmed that trading during the first part of the year was in line with expectations. I’m pretty confident that Savills will continue to be successful. I reckon the group’s diversity should provide some protection against recession risks.

My main worry about Savills is that its growth may have been boosted by ultra-low interest rates since 2009. With these now rising in most parts of the world, I wonder if Savills’ growth could slow.

However, I think that some risk is already priced into Savills stock. This FTSE 250 share currently trades on 10 times forecast earnings, with a well-covered dividend yield of 3.2%.

I reckon this stock looks a fairly safe buy at this level. I’m hoping to add the shares to my portfolio when I have some cash available.

Despite this downward trajectory, the group’s 12-month return is still a respectable 10%. So what was in this announcement that has investors so upset? And should I look at this as a buying opportunity for my portfolio?

A bit of background

As a quick reminder, Rotork is a global engineering company leading the charge in flow-control instruments. These are specialist tools used throughout several industries, including oil & gas, water & waste management, and chemicals production.

Although the business sells a niche collection of products, it seems demand from its customers remains strong. Why? Because over the last four months, order intake is up by a high single-digit percentage in-line with expectations.

Despite pandemic disruptions, customers are still spending increased amounts on upgrading or developing new facilities that require the firm’s instruments. Needless to say, rising demand and a growing pile of orders is a positive sign for the Rotork share price. So why is the stock falling?

Covid-19 versus supply chains

Developing and manufacturing specialist equipment requires unique components, specifically semi-conductor chips and electronics. But due to the pandemic, resource deliveries to the group’s manufacturing facilities are frequently delayed, often on short notice.

Consequently, several production lines have had to be shut down repeatedly for periods spanning up to several weeks. In other words, while customer orders are on the rise, Rotork is struggling to fulfil them.

Since the company usually gets paid on item delivery, revenue over the past four months is down year-on-year. And due to inflationary pressures pushing up the cost of raw materials, operating profit margins have also taken a significant hit. That’s obviously bad news for the Rotork share price.

Over the long term, supply chain disruptions will eventually be resolved. But in the near term, they’ll likely continue to pose a problem. At least that’s what management thinks since it provided guidance that expects revenue to stay depressed for the remainder of the year.

Is the falling Rotork share price a buying opportunity?

Seeing the revenue stream getting somewhat derailed is frustrating. But due to the exceptionally niche segment Rotork operates in, its list of competitors is quite short. And all of them are likely suffering from the exact same issues. That indirectly creates a bit of stickiness for customers simply because there isn’t really an alternative firm to source necessary components from.

Supporting evidence of this is clear since management anticipates “entering 2022 with a record year-end order book.” 

If the company can get its products off the manufacturing line and into customers’ hands next year,  today’s drop in Rotork’s share price could be a buying opportunity for my portfolio.

Personally, I’m going to wait and see what happens before committing to an investment. Therefore, Rotork is staying on my watchlist for now.

For context, the company scores well against quality indicators. For example, the operating margin is running just above 20%. And the business is delivering a return against invested capital of a little over 19%. I’m also keen on the small net cash position on the balance sheet. And I like the company’s long, multi-year record of steady revenue, earnings and cash flow.

Why I think Rotork is a top UK stock

In short, Rotork strikes me as a quality operation. And the business traded well through the pandemic. Meanwhile, in the April update, the directors confirmed that activity “continued to improve” in the first quarter of 2021. So, that’s two ticks on my stock-picking checklist. A quality set-up, and an improving business.

Like many companies, Rotork has been seeing rising input costs, such as raw materials, commodities and logistic services. But commodity cost inflation will likely be offset by the company’s selling price increase applied in January. And the ability of many businesses to raise their prices is why I reckon stocks can be a decent asset to hold when inflation bites. Rotork also applied temporary surcharges to some delivery routes to mitigate the higher logistics costs.

The directors reckon the firm’s ‘Growth Acceleration Programme’ is on track. And as part of the plan, 2021 should see progress towards supply chain optimisation and an IT solutions roll-out. Meanwhile, the directors reassured shareholders the business “continues to be highly cash generative.” And the net cash figure on the balance sheet stood at almost £191m on 4 April, up from just over £178m on 31 December 2020.  

The strength of Rotork’s cash performance is great news for shareholders because the directors decided to pay the dividend for 2020. So, despite the pandemic, the company hasn’t missed a single dividend payment. And I think a firm’s dividend record speaks volumes about the strength and resilience of a business.

A positive outlook

Looking ahead, the directors reckon the business is strengthening and they see Rotork as “well-placed” to benefit from recovering demand. City analysts expect earnings to increase by a high single-digit percentage in both 2021 and 2022. That strikes me as a decent rate of growth. However, the company could miss those figures if the world economy turns downwards again. And I’d then likely lose money on the shares.

Meanwhile, Rotork carries a full-looking valuation. With the share price near 349p, the forward-looking earnings multiple for 2022 is just above 25. Perhaps there’s an elevated risk in a valuation that high. However, higher valuations can remain in place for years and act as a marker of quality.

I’m bullish about the world economy and Rotork’s prospects. So I’d be inclined to invest £2,000 in the shares today with the aim of holding for at least five years. Although a positive investment outcome isn’t certain or guaranteed.  

We’ll find out more about the company’s progress with the half-year results due on 3 August.

Best stocks to buy now

The first company I would buy today is dotDigital (LSE: DOTD). I think this business could provide attractive returns for its investors no matter what the future holds.

It’s engaged in providing software as a service (SaaS) and managed services to digital marketing professionals. This is a market that has been affected by the pandemic, but it has escaped the worst of the downturn. DotDigital’s net income increased by 21% last year.

Analysts believe this trend will continue in 2021. They’ve pencilled in an increase in net profit of around 10% for the period. 

However, these are just forecasts at this stage and should be taken with a pinch of salt. The company may perform better or worse than these estimates. They’re only designed to give a rough guide to dotDigital’s potential. 

Still, I believe its product has a considerable market. So, no matter what happens over the next 12 months, I think its revenues and net income can grow steadily in the long term. 

That being said, the SaaS market is incredibly competitive, and dotDigital is relatively small compared to its large American peers. The most significant risk facing the company is the threat of competition. There’s also the challenge of cybersecurity. A big data leak or hack could seriously impact the company’s reputation. 

Nonetheless, I reckon dotDigital could be one of the best stocks to buy now for long-term growth, despite these risks. 

Economic expansion

Another company I would buy based on its potential to benefit from the global economic recovery over the next few years is actuator manufacturer and flow control company Rotork (LSE: ROR). 

The pandemic hit the company’s sales and operating profit last year, but the outlook for the group is improving. Increased economic activity around the world should lead to more demand for industrial equipment, which could be positive for Rotork’s order book. As such, I think an improved economic outlook will lead to better investor sentiment towards the business. 

The group still faces headwinds, however. Management does not expect revenues to recover to 2019 levels in 2021. A lot depends on whether or not the global economic recovery does gain traction over the next 12 months. This is far from guaranteed. Another wave of coronavirus could cause a considerable headache for industrial companies like Rotork. 

Still, as a way to play the economic recovery, I think this is one of the best stocks to buy now. That’s why I would buy shares in Rotork today while keeping an eye on the risks the business currently faces. 

I reckon the business is well-placed to thrive as the world builds back from the coronavirus pandemic. And today’s full-year results report demonstrates the business navigated the difficulties of 2020 well.

Why I think Rotork is a UK share to buy now

One of the key indicators, for me, is what the directors did about shareholder dividends. And the news is good. After first postponing payments when the pandemic first hit, they declared today the total payment for the year will go ahead. And it’s 1.6% is higher than the prior year.

Although revenue in 2020 came in down 7.4% and adjusted earnings per share slipped by 3.1%, Rotork has a “highly cash generative business.” There’s a multi-year record of generally rising free cash flow. And the balance sheet looks robust with its modest net cash position.

And I like the firm’s other quality indicators, such as the return on capital and the operating margin, both running just below 20%. However, the company’s attractions have been acknowledged by the market and the shares come with a full-looking price tag.

The stock looks buoyant today on the news of these results. And with the share price near 372p, the forward-looking earnings multiple for 2021 is a little under 30. However, City analysts expect a modest advance in earnings just above 5% for that year.

Chairman Martin Lamb explained in the report the outlook for the company’s end markets is improving. Although there’s still uncertainty regarding the future course of the pandemic, Rotork’s production facilities are operating “largely” as normal. And I reckon the relative strength of today’s figures shows the firm traded well last year through the lockdowns.

A solid order book

Looking ahead, Lamb also said the order book is “solid”. As reasons to be optimistic about the outlook, he pointed to the “considerable flexibility” provided by the strong balance sheet. He thinks the recent reinvestments into the business have strengthened it and placed it well to benefit from recovering demand.

The company’s goal, he said, is to deliver “sustainable” mid-to-high single-digit percentage revenue growth over time. On top of that, the firm is targeting an adjusted operating margin in the “mid-20s”.

I see Rotork as a potential long-term quality investment that I’d aim to hold for at least 10 years. But it’s worth noting the business has endured volatile periods in the past. For example, around 2014/15 earnings and the share price dipped. And the stock has only just risen above a trading range and consolidation of some eight years in duration.

Nevertheless, I’m tempted by the resilience of the underlying business. And I’d aim to buy some shares on dips and down-days to hold for the long-haul. However, I’m not expecting fireworks ahead. And the high valuation could bite me if earnings fail to grow as expected.

A first-half update Tuesday showed solid progress across the board, with orders up 7%, revenue up 9%, underlying pre-tax profit up 7% as reported (and 2% on an organic basis), and underlying EPS up 6%.

On the basis of the strength of the first half, chief executive Tony Wood said: “We have increased our full year organic revenue growth guidance to 4 to 6% and remain on track to deliver a margin improvement of between 0 and 50 basis points in 2019.”

Cash

On the progressive dividend front, he added: “The acceleration in growth and our continuing confidence in the prospects for the group underpins our interim dividend increase of 5% to 5.55p.”

The full-year dividend is predicted to grow by the same proportion, and my view is that steady rises ahead of inflation are the true mark of a good long-term dividend.

One thing I like about Meggitt is it bases annual dividend growth on underlying long-term prospects, not on year-by-year earnings. That’s good, because the timing of multi-year contracts and payments in the aerospace and defence business is often erratic in the short term, and long-term investors need to look beyond that.

The shares have had a bullish month, and that’s raised them to a forecast P/E valuation of 16.3. But that would drop to around 14.5 on 2020 forecasts, and I think it’s a fair valuation for what I see as an attractive and safe long-term investment.

Jump

Rotork (LSE: ROR) shares got an even bigger boost from first-half results, popping up nearly 10% in morning trading, although on the face of it the figures looked mixed.

Orders dropped 1.3%, with revenue down 4.3%, though adjusted operating profit improved by 1.7% (with an operating margin up 120 basis points). Adjusted earnings per share rose by a modest 1.5%, but the company raised its interim dividend by 4.5%, “reflecting confidence in progress for the full year.”

Chief executive Kevin Hostetler says the firm should deliver “mid to high single digit revenue growth and mid 20s adjusted operating margins over time.” This is another business I think is likely to see short-term volatility as a result of the nature of long-term contracts and a cyclical side to the industry.

Brexit

The flow-control specialist supplies global oil & gas, power and water businesses, and could be one to go for to protect your investments from the growing possibility of a no-deal Brexit. I suspect the defensive global nature of its business has been attracting investors. But I can’t help feeling that might have pushed the share price up a bit far.

We’re looking at a P/E of nearly 23 based on full-year forecasts which, for me, puts it pretty much in the realms of growth valuations. But it’s at a time when EPS growth is expected to fall from last year’s 19% to just 3%.

After a tough second half in 2018, I can’t help wondering if the price might be getting a bit overheated again in 2019. I think I’d wait for better buying opportunities.

In my opinion, this makes the company one of the best investments around to protect your portfolio against Brexit. No matter what the outcome, demand for soft drinks throughout Europe is unlikely to change as a result of Brexit.

What’s more, virtually all of the company’s products are sold in European markets, so if the UK economy struggles after a no-deal, Coca-Cola HBC should continue to profit. Indeed, thanks to its geographical diversification, and defensive product line up, management expects the overall impact from Brexit on the group to be “minimal.” 

I’m also attracted to the company’s dividend credentials. For the past five years, Coca-Cola HBC has increased its dividend at a rate of 10% per annum. Based on current figures, the payout is covered 2.3 times by earnings per share (EPS), which gives plenty of room for further payout growth. 

With EPS set to grow 19% over the next two years, in this period I reckon the dividend will grow faster than it has in the past. There’s also significant scope for earnings growth from current levels as management believes the European market is “fertile for price increases.” This tells me the outlook for Coca-Cola HBS’s dividend is extremely positive. 

Falling sales 

Talking of flowing liquids, Rotork (LSE: ROR), the market-leading producer of flow control products, is sliding today after the firm reported a 4% decline in order intake, or by 2% on an organic constant currency basis. 

These figures seem to imply that the company’s growth is going to slow in the near term, a reality that is at odds with the stock’s current valuation of 22.9 times forward earnings. I’m always wary of buying high-priced stocks for this reason. If growth doesn’t live up to expectations, then the resulting sell-off can be sudden and aggressive. I don’t want to be on the wrong end of a profit warning. 

With this being the case, I’m not a buyer of Rotork today. As of yet, we don’t know if this decline in order intake is a one-off, or a sign of things to come. If it is a sign of things to come, I reckon the downside from current levels could be significant, considering the current premium valuation investors are placing on the shares. 

The one redeeming feature of this business is its strong balance sheet. According to today’s trading update, Rotork had a net cash balance of £12.2m at the end of October. Unfortunately, this isn’t enough to convince me that the business is worth buying, and neither is the token dividend yield of 2%. I would much rather add Brexit-proof Coca-Cola HBC to my portfolio.

While this increase means that the firm now trades on a rather off-putting valuation of 31 times expected earnings for 2018, I still think the stock warrants attention from growth investors keen on achieving financial independence, especially after today’s positive interim update.

Strong order book

Group revenue climbed 12% to a record £37.9m in the six months to the end of June. At constant currency, this rise equated to a 17% improvement on the same period in 2017.

The above included a 4% increase in revenue from its Polyolefin Foams, thanks in part to the firm’s decision to increase capacity at its base in Kentucky, USA.

Even more impressive were sales figures relating to Zotefoams’s High-Performance Products. These jumped 82% over the period and now contribute 24% of total sales, compared to 15% a year ago. 

Collectively, this trading helped the company register a 64% jump in pre-tax profit to £4.6m.

Continuing the trend of consistent-if-modest dividend hikes, Zotefoams also announced a 3.1% increase to its interim payout this morning (to 1.97p per share). While the forecast 1.1% is hardly tempting, modest dividend increases are more preferable in my book to high yields that can’t be maintained.  

Ultimately, however, Zotefoams remains focused on becoming a far bigger beast. With three projects to expand capacity running to plan, CEO David Stirling stated that the company had commenced H2 with “a strong order book, a differentiated product portfolio and continued growth expectations across all business units“.

Returning to the valuation, it’s true that a lot of growth already appears priced in. Nevertheless, a P/E of 26 in 2019 — assuming expectations are met — looks far more palatable. This being the case, I wouldn’t blame growth hunters from keeping the firm on their watchlists.

Long-term hold? 

Also reporting half-year results this morning was actuator manufacturer and flow control company Rotork (LSE: ROR). Like Zotefoams, the £3bn cap’s shares have been on a roll, rising 52% over the last year and today’s positive numbers were — perhaps inevitably — also greeted with a drop in the stock price.

Revenue rose 14.8% to £331m over the six months to the end of June while pre-tax profit climbed 17.2% to £54.7m. Another reliable dividend-hiker, Rotork declared a 7.3% rise to its interim payout (2.2p per share). 

CEO Kevin Hostetler reflected that the company had witnessed “a continuation of the more favourable market trends” seen in Q4 of the previous financial year and had also received “several large orders” during Q1, contributing to a 13.3% rise in order intake over H1. Rotork expects “high single-digit” growth for the full-year and adjusted operating margins to be “slightly ahead” of those achieved in 2017.

Since the aforementioned orders was already known by the market, today’s fall smacks of profit-taking. That said, the announcement that an investment programme in areas such as service infrastructure and IT has been initiated might have also contributed, particularly as the amount of cash dedicated to this “will continue to increase through the year”.

Based on analyst projections, Rotork’s shares change hands on a punchy 28 times earnings following today’s fall. So long as your time horizon runs to years rather than weeks, I see no reason to jettison the stock as things stand.  

However, it’s not the only stock that could be about to deliver a period of high growth. Reporting on Monday was a company which could be worth a closer look because of its strong earnings growth potential.

Impressive performance

The company in question is actuator manufacturer and flow-control company Rotork (LSE: ROR). It released a trading update which showed that revenue in the first quarter of its financial year increased by 10.2%, with order intake rising by 27% on an organic constant currency basis. This reflects a continuation of the more favourable market trends which were present in the latter part of 2017.

The company has also received several major orders that have helped to positively catalyse its top line. This means that it now expects revenue for the full year to increase in the mid-to-high single-digits versus the previous year.

In terms of profitability, Rotork is expected to post a rise in its bottom line of 9% in the current year, followed by further growth of 12% next year. Both of these figures would represent a marked improvement on its performance in the last couple of years, where the company has struggled to generate growth that is ahead of the wider market.

With the company focused on reinvesting capital in the business, it is in the process of laying the foundations for sustainable growth. As such, now could be the right time to buy it, with its strong cash flow and modest net debt levels suggesting that it has a solid risk/reward ratio.

Turnaround potential

Of course, Saga is not expected to perform as well as Rotork over the course of the current financial year. The over-55s specialist is forecast to report a fall in earnings of 5% as it seeks to reposition itself under a new strategy. This is intended to make it more efficient and leverage the relatively high levels of customer loyalty that the company enjoys.

Since Saga is forecast to return to positive earnings growth of 2% in the next financial year, its current price-to-earnings (P/E) ratio of 11 may prove to be relatively modest. Certainly, the company is experiencing a difficult period and remains somewhat unpopular among investors. But with a 7% dividend yield that is covered 1.4 times by profit, it seems to have a mix of value and income appeal.

Certainly, it may lack strong growth prospects at the present time. But with a diverse business model that appears to be strong on an underlying basis, it could prove to be a sound investment for the long term. That’s especially the case since the FTSE 100 trades above 7,000 points and some investors may feel there is a lack of value on offer in the wider index.