Oxford Instruments is already a '10-bagger'. Buying its shares at their nadir in 2009 would have made you a fortune. But don't despair if that wasn't you. Rapid growth in demand for Oxford's high-tech equipment is now backed up by a bullish share price chart formation that suggests there could be much more to come.
- Share price through technical resistance levels
- Nanotechnology market growing fast
- High-tech niche products
- Possible bid target
- Threat of weaker research and development spend
- Exposed to a downturn in China
We are not completely lost to the dark art of technical analysis. However, it is difficult to ignore the convincing case for buying Oxford's shares made by Investors Chronicle's in-house technical analyst, Dominic Picarda (see box). What's more, the fundamentals of Oxford's business are sound. A big increase in profit margins helped underlying profits surge by three-quarters in the first half of 2011-12 and City analysts expect further rapid growth in earnings in the coming years.
Most momentum is coming from the nanotechnology division, which develops tools such as advanced microscopes for research scientists. Oxford has enviable market share, too - as much as 60 per cent in some areas. Specialist kit like this can sell for $0.5m and is expected to contribute almost half of group profits in 2011-12. Over the next three years, industry experts predict a compound annual growth rate of 20 per cent from this market. A big slice of that will come from China - now Oxford's second-largest market behind the US - where sales grew 70 per cent in 2011.
True, a hard landing in China could crimp Oxford's research budget, but that looks unlikely given China's thirst for this kind of technological expertise and the financial commitments in Beijing's new five-year plan. And even Oxford's industrial products division, which is more cyclical, enjoys a degree of protection, given the global trend for tighter regulation.
OXFORD INSTRUMENTS (OXIG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,134p | MARKET VALUE: | £636m | |
| TOUCH: | 1,131-1,134p | 12-MONTH HIGH/LOW: | 1,198p | 600p |
| DIVIDEND YIELD: | 0.9% | PE RATIO: | 20 | |
| NET ASSET VALUE: | 222p | NET CASH: | £11.9m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 177 | 5.0 | 5.6 | 8.4 |
| 2009 | 207 | -9.3 | -13.9 | 8.4 |
| 2010 | 212 | 18.1 | 27.2 | 8.4 |
| 2011 | 262 | 26.7 | 65.3 | 9.0 |
| 2012* | 336 | 39.2 | 57.6 | 9.9 |
| % change | +28 | – | – | +10 |
Normal market size: 400 Matched bargain trading Beta: 0.7 *Liberum Capital (profits and earnings are not comparable with historic figures) | ||||
All this is overseen by a highly regarded and ambitious management team, led by chief executive Jonathan Flint. When he joined Oxford in 2005, he introduced a commercial focus previously lacking. A five-year plan smashed organic growth targets and profit margins rose from 3 per cent to nearly 11 per cent (they are now 12 per cent).
A latest plan - "14 Cubed" - aims for growth in revenue of 14 per cent until 2014 and for margins to hit that figure by that year. And achieving those targets will have been helped by acquiring nanotechnology companies Omicron and Omniprobe last year.
However, Ben Bourne, an analyst at broker Liberum Capital, believes Oxford could do much more. "The benefit of ongoing operational improvements, better pricing and gearing should push the margin to at least 16 per cent," he says. That would drive a 17 per cent upgrade to operating profit forecasts for 2013 and 37 per cent for the year after, giving EPS of 122p for calendar year 2014. If the shares trade on their long-term average of 16 times earnings, they could be worth near £20 by then.
And Mr Bourne's assumptions are, in his words, "not heroic". Hit them, and a re-rating of Oxford's shares beckons. What's more, none of this prices in potential bid interest. Oxford's portfolio would be a great fit for larger US rivals, especially now that the company's pension deficit is less of an issue. Nasdaq-listed Bruker, for example, has been losing market share to the UK company, and has money to spend.
The technical picture
From a technical analyst's perspective, Oxford Instruments' uptrend is in very good shape. The price has risen in a steady and sustainable fashion ever since its last major low in late March 2009. Having exceeded its previous all-time high of 541p as long ago as October 2010, the share is in 'blue-sky' territory. In other words, there are no historic price levels standing in its path.
The only drawback is that Oxford looks somewhat overbought on its weekly and monthly charts. Its monthly relative strength index is 73 per cent, which is fairly high and puts the price at some risk of reversal. However, it has reached higher levels in the past before this happened. More tactically-orientated investors could try to time their purchase of this share for when the price next comes down to the 21-week exponential moving average (currently 990p).
