It was a year driven by substantial re-rating for electronics groups, as for their engineering peers. Share prices finished 2013 up more than a fifth, but timing, more than ever, had a significant impact on investors' profits. Tapering talk and a Chinese credit crunch ruined not only the second quarter, but the entire first half, and the gain from March to the year-end was just a handful of percentage points; a buyer in June would have been quids in. An equally significant level of care will be required this year, too.
Generous ratings and potentially elusive growth kept us away from specialist printer Domino Printing Sciences (DNO), and, after an 87 per cent gain on our long-standing buy tip, convinced us to downgrade Spectris (SXS). Two months later the share price crashed. And highly-rated Renishaw (RSW) tested our patience once too often. Costs have soared at the precision tools company, and tough comparators make earnings growth a pipe dream. However, awake to the obvious sector re-rating, we backed Halma (HLMA) again after a 12-month break and our faith has, up to now, been rewarded.
The prize for standout performer of 2013 goes to ink-jet printer technology specialist Xaar (XAR), by a country mile. It was clear the shift from analogue to digital printing in the ceramic tile industry had substantial growth potential, but a lofty valuation multiple looked to have factored that in. It hadn't. We exited our buy advice in March with a 64 per cent profit, but by December the shares were almost 400 per cent up on our tip price. Still, the likelihood of more modest EPS growth in 2014, combined with a forward earnings multiple of 25, a 30 per cent premium to peers, make us gulp.
Clearly, an economic upturn in Europe would be helpful, particularly for unloved industrial supplier Morgan Advanced Materials (MGAM). It seriously lagged peers last year, but, if you believe Investec Securities' forecasts, should outgrow them all in 2014. Business disposals could be a regular catalyst for the share price in the months ahead, too.
That underlying growth will be crucial, particularly as the strong pound is making life tough for UK exporters. Morgan, like most in the sector, makes very little money in Britain, so all its sales must overcome a currency headwind this year. Oxford Instruments (OXIG), in the process of buying scientific camera maker Andor (AND) for a hefty £176m, must, too. Yes, the deal will provide an immediate boost to earnings, but pressure on government funded research budgets remains a concern.
| Company name | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | Share price change in 2013 (%) | Last IC view |
| Domino Printing Sciences | 814 | 913 | 23 | 2.7 | 31.2 | Hold, 705p, 20 Dec 2013 |
| Halma | 622 | 2,349 | 23 | 1.7 | 31.4 | Buy, 571p, 19 Nov 2013 |
| Hellermanntyton | 311 | 670 | NA | 0.0 | NA | Hold, 270p, 2 Sep 2013 |
| Morgan Advanced Materials | 327 | 932 | 18 | 3.1 | 18.4 | Buy, 289p, 19 Dec 2013 |
| Oxford Instruments | 1,793 | 1,022 | 29 | 0.6 | 24.2 | Hold, 1,689p, 12 Dec 2013 |
| Renishaw | 1,924 | 1,400 | 21 | 2.1 | -6.0 | Sell, 1,529p, 24 Jul 2013 |
| Spectris | 2,372 | 2,815 | 18 | 1.7 | 25.0 | Hold, 2,100p, 26 Jul 2013 |
| Xaar | 1,030 | 781 | 27 | 0.5 | 300.7 | Hold, 837p, 29 Aug 2013 |
FAVOURITES:
Morgan Advanced Materials looks primed for a better year. As well as a significant slug of self-help, the inevitable impact of improving economic activity on earnings growth should be enough to restore confidence and narrow the significant ratings discount to peers. Long-term growth drivers should uphold Halma's reputation as a reliable performer, and an ongoing repair job makes Spectris one to watch.
OUTSIDERS:
Despite its obvious charms, Renishaw's current earnings multiple sits uncomfortably alongside forecasts of a drop in profit this year. Only a surprise turn of events will alter our opinion significantly - although we are on our guard given the unpredictable nature of sales.
