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Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
Amid widespread economic doom and gloom, some investors may be surprised to encounter a company that is performing exceptionally well. Indeed, tariff chaos, sticky inflation across the developed world and a slower pace of monetary policy easing than previously anticipated have led many investors to assume that all company earnings will inevitably disappoint.
However, FTSE 100 index member IMI’s recently released results showed that it generated a 10pc rise in organic operating profit, which excludes the impact of acquisitions, in its latest financial year. This was despite the engineering company posting a rather modest 4pc rise in organic revenue versus the previous year, with its various segments experiencing mixed market conditions amid an uncertain economic period.
The firm’s double-digit profit growth was largely due to an improved profit margin. At the operating level, it increased by 100 basis points year-on-year to 19.7pc as the company generated £15m of cost savings as part of a five-year efficiency programme.
It is now targeting a further rise in its operating profit margin to in excess of 20pc, which should have a positive impact on its bottom line. In the current year, for example, the firm expects to deliver an 8pc rise in earnings per share.
A significant increase in IMI’s profit margin highlights its improving competitive position. The company also delivered a return on equity of 24pc last year, which was achieved despite it having a net gearing ratio of just 51pc. And, with net interest cover amounting to roughly 14 in its latest financial year, the firm has the means to conduct further M&A activity to boost profitability, even though it has made several acquisitions over recent years.
Alongside its annual results, the business announced a £200m share buyback programme for the current year. This follows the completion of last year’s £100m in share repurchases and, with the company forecasting that it will generate over £1bn in free cash flow over the next three years, it would be unsurprising if further share buybacks are announced in due course.
Although the firm’s shares are by no means cheap at their current level, with them having a price-to-earnings ratio of 13.6, they nevertheless offer good value for money in Questor’s view. Solid fundamentals and the prospect of high single-digit earnings growth mean the stock is worthy of a premium valuation vis-à-vis the wider FTSE 100 index.