Why I’d shun 25% faller Flowtech Fluidpower and buy this FTSE 100 rising star
The share price of hydraulic power product supplier Flowtech Fluidpower (LSE: FLO) fell by as much as 29% on Tuesday morning.
The sharp drop was triggered by a profit warning caused by contract delays and management guidance that “growth may be softening”.
Lost profit
Delays to a £1.5m contract for the Thames Tideway project mean that this revenue will now slip into 2019. Operating profit is now expected to be “marginally below market expectations” this year.
Another surprise is that long-serving chief executive Sean Fennon has decided to retire this year, and will “relinquish his executive duties … with immediate effect”. Mr Fennon will be succeeded by chief financial officer Bryce Brooks, so there should be no leadership vacuum. But I get the feeling that Mr Fennon’s departure may have been rushed slightly.
Growing pains?
Today’s half-year figures from Flowtech suggest to me that after a string of acquisitions, the group may be experiencing some growing pains.
Revenue rose by 65% to £56m as acquisitions added volume, but underlying operating profit only rose by 26% to £5.7m. This means that the group’s operating margin fell from 13.1% to 10.1% during the period.
Alongside this, net debt has risen by 114% to £18m over the last year, mostly due to acquisition spending. Another concern is that customers are taking an average of almost six months to pay their bills, leaving a lot of cash tied up in the business.
The company says it is putting its acquisition programme on hold to focus on developing its corporate infrastructure. This sounds sensible and may explain why Mr Fennon is being replaced by his top bean-counter — a traditional choice when financial improvements are required.
Flowtech shares look cheap after today’s fall, on about 7 times forecast earnings with a forecast yield of 5%. But I think there could be more bad news to come. I’d steer clear of this stock for now.
A rising star
The share price of FTSE 100 firm Ashtead Group (LSE: AHT) has doubled over the last two years. This equipment rental firm hires out gear to construction companies and industrial customers. It operates the A-Plant business in the UK, but 85% of revenue comes from the Sunbelt business in the USA.
Like Flowtech, Ashtead has been taking advantage of a fragmented market to make regular acquisitions and increase market share. The firm spent £145m on small acquisitions during the three months to 31 July. This helped to lift revenue by 22% to £1,047m and pre-tax profit by 23% to £274m.
Note how both revenue and profit rose by roughly the same amount. This shows that profit margins are holding up as the company expands. That’s something I like to see.
Is it too late to buy?
The group would be exposed in the event of a slowdown in the booming US market. But the company reported “strong end markets” during Q1 and said that full-year profits are now likely to be ahead of expectations.
Analysts’ are forecasting earnings of 165p per share for the current year. This puts the stock on a forecast P/E of 14, with a prospective yield of 1.6%. The yield is low due to cash flow being invested in growth. But debt is under control and this valuation doesn’t look excessive to me.
I believe Ashtead could still be worth buying if you want exposure to the US economy.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
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