FTSE 250 roofing and insulation group SIG (LSE: SHI) climbed 13% this morning, after it said sales rose by 11.2% in 2016. It issued a profit warning in November and today said underlying pre-tax profit would be in line with revised guidance of £75m-£80m. That's significantly lower than both 2015 (£87.4m) and 2014 (£99.1m).
This downward trend suggests to me that we need to be cautious before investing fresh cash in SIG. Are there still problems ahead?
Not so great after all
SIG's total sales rose by 11.2% to £2,738m last year. But the firm's breakdown of this growth makes it clear that underlying demand is still pretty flat.
Foreign exchange movements contributed 6.9% to sales growth, while acquisitions provided another 3.7%. Of the remainder, 0.3% came from additional working days, and 0.3% came from like-for-like sales growth.
Mel Ewell, SIG's chief executive, says that the group's "transformational change programme" led to the company being "distracted ... from our customers" last year. This doesn't seem very encouraging to me.
In 2017, SIG's priorities will be to "restore our customer focus" and to reduce debt. The group wants to reduce net debt from two times EBITDA to between one and one-and-a-half times EBITDA. Capital expenditure and spending on acquisitions will be cut in order to improve cash generation.
My concern is that there's no obvious path back to growth for SIG. Consensus forecasts suggest that the group's earnings will fall by 3% in 2017 and I tend to agree. I don't see any reason to invest at the moment.
From strength to strength
By contrast, FTSE 100 engineering group GKN (LSE: GKN) appears to be performing well. Shares in the firm have risen by more than 20% over the last year, but the stock still looks affordable to me, on a 2016 P/E of 11.5.
Indeed, GKN's strong cash flow and rising earnings suggest to me that there could be more to come. Its dividend has grown by an average of 11.7% per year since 2010, but is still well covered by free cash flow and earnings per share.
Although the group's forecast yield for 2016 is below average at 2.7%, I think this could still be attractive. It's sometimes worth accepting a lower yield in order to buy into a strong, cash-backed payout with growth potential.
Another thing I like about GKN is that debt levels are fairly low. The group's half-year net debt of £918m means that GKN's net debt to EBITDA ratio is just one. That's pretty low risk, in my view.
The only area that does concern me slightly is that GKN's profit margins have been falling for several years. Based on the group's reported figures, the operating margin has fallen from 9.6% in 2012 to just 4.5% in 2015. Its trading profit, an adjusted figure, gives a more positive picture. Management believes this is more representative of the true profitability of the business.
In this case, I'm willing to give GKN's management the benefit of the doubt. The group's balance sheet is strong and the shares trade on an undemanding 2017 forecast P/E of 10.3. In my view, this could be a good time for long-term investors to buy more.
Don't miss this dividend recovery play
If SIG and GKN are potential buys for your portfolio, then I'm sure you'll also be interested in the mid-cap industrial firm featured in A Top Income Share From The Motley Fool.
This UK-based company offers an attractive yield and has previously been mentioned as a potential takeover target. Our expert analysts believe the firm may be significantly undervalued at current levels.
To find out more, download this free, no-obligation report today. To get started, simply click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of GKN. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.