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Goodwin opts for market share over margins

The Stoke-based engineer has been struggling to contend with a $530bn black hole
August 3, 2016

Earlier this year, shares in engineering group Goodwin (GDWN) spiked following release of a third-quarter update indicating that trading over the April 2017 financial year was unlikely to be as difficult as it had once feared. However, a cursory glance at the group's preceding full-year figures begs the question 'difficult compared to what?'

IC TIP: Hold at 2075p

With operating profits down 38 per cent to £12.7m, you can't help but conclude that Goodwin's exposure to the extractive industries must have soured medium-term expectations to an alarming degree. That pessimism may well reflect the perceived vulnerability of small-cap stocks to markets in downtrend; small is rarely beautiful where cyclicality is concerned.

The Stoke-based firm has been diversifying its business mix, while cutting prices in a bid to ameliorate unfavourable trading conditions. Sacrificing the margin to prop up the top line is a legitimate response; but pursuing this strategy indefinitely obviously isn't an option.

The group cited the slowdown in China's economy and a fall-away in spending in jewellery markets as reasons why business performance within the refractory engineering segment has suffered. But Goodwin's businesses also serve oil and gas markets, which, as management helpfully points out, have been subject to cancelled or delayed projects to the tune of $530bn (£397bn) - that's a fair-sized elephant in the room.

GOODWIN (GDWN)
ORD PRICE:2,075pMARKET VALUE:£149m
TOUCH:2,050p-2,100p12M HIGH / LOW:2,525p1,430p
DIVIDEND YIELD:2.0%PE RATIO:17
NET ASSET VALUE:1,199p*NET DEBT:24%

Year to 30 AprTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201210812.312432.1
201312720.321235.3
201413124.126442.3
201512720.120942.3
201612412.312342.3
% change-3-39-41-

Ex-div: 8 Sep

Payment: 7 Oct

*Includes intangible assets of £17.6m, or 244p a share.