IMI offers a second bite of the cherry

A lot has happened to IMI since the last time we recommended buying its shares 13 months ago. It has handed over £110m for German valve maker Zimmermann & Jansen, parachuted industry expert Roberto Quarto into the chairman's seat and its shares have won promotion to the FTSE 100 index. Add in strong first-half results for 2011 and the investment case is as convincing as ever.

The share price peaked in July, rewarding readers who followed our advice with a gain of over 50 per cent. Since then the price has fallen by a quarter because shares in cyclical engineers are at the forefront of the market's anxieties. No need for long faces, though. IMI has done all we hoped for: improving profit margins, generating organic growth and delivering acquisitions.

Over £1bn of sales were generated in the first-half, a 12 per cent increase on last year, and up 8 per cent on an organic basis compared with 6 per cent in the first four months of the year. Profit margins widened to 17 per cent and underlying profits rose 26 per cent to £171m. Top marks went to the Fluid Power division, where organic revenue grew 16 per cent. Its sales from commercial vehicle makers rose almost 40 per cent year-on-year, as North American fleets upgraded their braking and fuel delivery systems to meet new rules.

And demand from train makers for IMI's pneumatic door operating systems is set to swell as China, India and eastern Europeans invest huge sums in rail. IMI's box of tricks also includes a DNA finger-printing device and portable respirator the size of a can of Coke - all clever stuff and products that are likely to see increasing demand.

True, business was less impressive at the Severe Service valves unit, where organic sales fell 1 per cent. Orders won at lower prices during the downturn in 2009 eroded profit margins and chief executive Martin Lamb acknowledges that some of these have still to be completed. But Mr Lamb points to a recovery in the final two months of the period, and says orders with better margins will begin to be shipped in the second half.

And IMI's City fans are backing its ability to weather a double-dip recession. It demonstrated clear defensive qualities during the last downturn. In 2009, operating profit margin fell by less than a percentage point and management boasts a "full array of operational measures" to quickly cut costs. The company has proved adept at finding savings and moving production to low-cost centres, which should account for 55 per cent of output by the end of 2014, compared with mid-40s today.

IMI is one of the UK's best run and most successful engineers, but it can't quite shake-off the 'industrial conglomerate' tag. Even that may soon change. A management re-shuffle hands back to Mr Lamb responsibility for the two retail businesses - beverage dispensing and merchandising, which turn out drinks machines and retail display units - and it's no secret that the board want to sell these. Disposals could raise up to £600m for further acquisitions in fluid controls, IMI's sweet spot. In addition, City analysts believe that IMI's ability to generate cash could add a further £800m to its fire-power.

So IMI may have the chance to do a really big deal. Still, finding a good fit at the right price will mean getting under the radar of US firms with swollen balance sheets - and that's not easy. There's even the possibility that hunter could become prey. Rumours of interest in IMI from US giants, such as Honeywell International, have been doing the rounds for years.