Momentum can work wonders for investors, if you hop on board early enough. These two stocks have plenty of forward motion, but can it continue?
The gen on GKN
It is nearly four years since I last looked at global engineering group GKN(LSE: GKN). It was on a roll at the time; its share price shot up 144% in three years. It stalled soon afterwards, but is now picking up the pace again, rising 36% in the last year, and 16% in the last three months. Is now the time to jump on board?
GKN's recent performance has been helped by a decent set of full-year results, with sales up 22% (just 2% for organic sales) and earnings per share (EPS) up 12%. I called this an engineering group, but it is increasingly an aerospace specialist, following the acquisition of Volvo Aerospace in 2012 and Fokker Technologies three years later. It appears to have integrated Fokker well, with strong performance in its first full year of ownership, and both sales and margins ahead of expectations.
Steady organic growth in commercial aerospace sales - up 3% - partly offset the decline in military sales, which fell 2%. However, there may be good news on the latter, as President Trump looks to boost US defence spending, and urging other NATO members to follow suit. Russia may be a growing threat to the West, but it is an opportunity for GKN.
The company announced a full year dividend of 8.85p per share, up 2% on a year previously. Its current yield 2.39% hardly excites, although cover of 3.5 suggests there is scope for further progression.
GKN looks reasonably valued at 11.98 times earnings. Growth prospects are promising, with EPS forecast to rise a healthy 7% this year, and 5% in 2018. You might want to examine its pension debt, with a deficit of more than £2bn, on top of net debt of £700m.
On the plus side, it should benefit from the paradigm shift towards electric cars and hybrid platforms, with GKN's eDrive segment set to quadruple sales from £50m to £200m a year by 2020. I think GKN should carry on motoring.
Chemicals company Croda International(LSE: CRDA) is also on a high, flying 27% over the last year, and 15% over the past three months. It was helped by a 13.2% increase in 2016 pre-tax profits to £288m, with record numbers in all core business sectors.
These results were flattered by post-Brexit sterling weakness. Sales increased 15% to £1.24bn, but this translated to just 3.1% at constant currency. With the pound apparently finding its floor, this tailwind may now fade. The company's recent acquisitions policy has been successful, with sales from this source contributing 4.7%.
Croda chief executive Steve Foots is proud of the company's "relentless innovation", with sales of new and protected products up 20%, the fourth consecutive year of growth. It also continues to expand in higher-growth markets, notably Asia. Croda now returns a healthy 24% return on sales and 19.3% return on invested capital. The full-year dividend was lifted by 7.2%, which helps offset any disappointment over its lowly 2.03% yield.
The only thing I don't like about this cash generative business is its current toppy valuation of more than 27 times earnings. However, forecast EPS growth of 25% this calendar year and 8% in 2018 suggest this might be a price worth paying.
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Harvey Jones 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.