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Stock market investors are interested in the future rather than the past. Take the rather disappointing half-results released by FTSE 250 industrial company Renishaw last month. They showed a decline in revenue of 5pc and a fall in pre-tax profits of 23pc amid tough operating conditions.
Yet the company’s shares surged 16pc higher on the day of release because of an upbeat outlook for the second half of the year. It’s the future that matters.
Renishaw expects to generate pre-tax profits of between £122m and £147m for the full year. Assuming an average of those figures, this equates to a year-on-year rise in profits of 16pc in the second half of the year.
Looking further ahead, analysts expect the company to produce earnings per share growth of 17pc in the 2025 financial year. This suggests that despite having a lofty price-to-earnings ratio of 27, the stock is not fully valued ahead of an improving global economic outlook.
Indeed, the company, a specialist in measuring systems that provide precise data to a wide range of customers is a highly “cyclical” business. It has suffered from a period of economic uncertainty that has prompted weak demand across several of its key regions.
For example, it reported a 6pc decline in sales in Europe, the Middle East and Africa in the first half of the year, while revenue in the Americas slumped by 13pc. This was in spite of parts of its business generating strong growth – its analytical instruments and medical devices segment recorded sales growth of 16pc, for instance.
Profit margins, meanwhile, narrowed in the first half of the year. The company’s gross profit margin before engineering costs was down three percentage points year-on-year at 61pc, with targeted price rises for its products failing to fully offset employee pay rises and adverse currency effects.
Encouragingly, it was able to limit the increase in engineering, distribution and administration costs to just 3pc.
Ultimately, though, Renishaw requires a more buoyant economic environment to deliver sustained growth in sales and earnings. Although expectations for interest rate cuts across developed economies remain highly changeable, given that inflation is proving to be stickier than previously expected, they are nevertheless firmly on the horizon.
Once time lags following their implementation have passed, interest rate cuts should act as a stimulus on the global economy and catalyse the financial performance of cyclical companies.
China, meanwhile, remains the company’s largest single market. It accounted for 27pc of total revenue in the first half of the year. The country’s uncertain near-term economic outlook amid of property market weakness could weigh on the company’s financial prospects in the short run.