Optical components and systems company Gooch &Housego(LSE: GHH) has pleased investors over the last five years with a more than 200% rise in its share price.
Growth on track
In today's half-year trading update for the period to 31 March, the firm says that trading has been good and "full-year trading remains in line with management's expectations", which is encouraging. To gauge what those expectations may be, I think it's worth looking at what City analysts following the company think. Their estimates average out to growth in earnings per share of 10% for the year to September 2017 and 15% for 2018.
The firm points to high-reliability fibre couplers for undersea cables, precision inspection equipment and critical components used in microelectronic manufacturing as areas driving sales within the telecommunications and industrial sectors. On 31 march the company's order book was up more than 70% compared to a year ago, at £66.6m.
Organic and acquisitive growth looks set to power further returns for investors as the company continues to invest in research and development (R&D) in pursuit of what chief executive Mark Webster describes as a "strategy of diversification and moving up the value chain."
A record of rising earnings
At first glance, the firm's valuation is not low, but the company has a steady record of growing its earnings over the last five years, which can often justify a higher rating.
At today's 1,247p share price the forward price-to-earning (P/E) ratio is just over 23 for the year to September 2018 and the forward dividend yield runs at a little over 0.8%. Forward earnings look set to cover the payout more than five times, which suggests the directors see plenty more opportunities to invest in growth ahead, rather than putting cash inflow into the dividend.
Meanwhile, the share price of light emitting diode (LED) lighting solutions specialist Dialight (DIA) has burst upwards by more than 150% since February 2016. Once again, the main driver of this movement in the share price is growth in earnings of the underlying business.
A plan for growth
City analysts following the firm expect earnings to expand by 36% during 2017 and by 41% during 2018. In February, chief executive Michael Sutsko explained that the firm is "making good progress with our three-year plan to return to sustainable profit growth." He says the company has rebuilt its operating model and is now pursuing "growth initiatives to capture the long-term opportunity in LED lighting."
At today's share price around 988p, Dialight trades with a forward P/E ratio of just over 19 for 2018 and the forward dividend yield runs around 1%. Forward earnings should cover the payout more than five times, so I assume the directors see more value for shareholders by reinvesting incoming cash flow for growth than in paying cash out with the dividend.
Both these firms exhibit strong upward trends in operations and their share prices. I reckon when the economy seems stable and decent companies are trading well with optimistic outlooks, it can pay to go with them, rather than hunting for 'seconds' in the bargain bin.
A quality opportunity
It makes intuitive sense to invest in strong, market-leading firms and many fortunes have been made doing just that. Yet many investors fall for the siren song of firms with operational problems making new lows.
I'd argue that 'quality' is the most important ingredient of value, though - even when we need to pay a little more to get it. Some firms have huge potential, such as the one covered in the Motley Fool's report called A Top Growth Share From The Motley Fool. You can take a look at this research to see what I mean by clicking here.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Gooch & Housego. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.