Perhaps because of these factors, Renishaw has got away with volatility in profits that might have slaughtered companies controlled by institutional shareholders; after all, what does it matter if accounting profits bounce around so long as both the underlying growth in earnings and the ability to generate cash are satisfactory?
Besides, outside shareholders in Renishaw reckon they hold an ace – the assumption that one day soon Renishaw’s founders, Sir David McMurtry and John Deer, aged 77 and 80 respectively, will call ‘time’. Those two own 53 per cent of the equity, so their departure will usher in a takeover bid from a big specialist engineer – the likes of Essilor International of France or perhaps even the UK’s Halma (HLMA) or Spirax-Sarco (SPX) – who will pay a big fat premium for control.
The trouble was that at the turn of the year all of that premium and more appeared to be in the share price. When the price peaked at £57.75 last month it had tripled since January 2016 and the rating was about 35 times this year’s likely earnings. So when Sir David actually announced he was scaling back his front-line involvement in Renishaw – switching from being both chairman and chief executive to simply executive chairman – the price, perversely, dropped 21 per cent and is now £46.80.
Yet even at that level it’s nigh-on impossible to make the case to buy. Besides, there is a – sort of – cut-price alternative to Renishaw ready and waiting – Spectris (SXS), which announced its results for 2017 this week. Its business lines overlap with Renishaw’s measuring instruments, although its best-known asset is the Millbrook Proving Ground for vehicles where, from time to time, Jeremy Clarkson and his Top Gear team played the fool.
Similar though they may be – right down to the market value of their equity – Renishaw and Spectris are markedly different in other respects, as the table shows. Renishaw’s shares are clearly rated the higher, although the bald figures in the table don’t make clear why that should be so. Sure, its growth rate in sales is brisk but somehow that hasn’t leveraged the growth in profits and earnings. Meanwhile, Spectris’s decent rate of earnings growth seems to be achieved despite its moderate sales growth.
| How Renishaw and Spectris measure up | ||
| Renishaw (RSW) | Spectris (SXS) | |
| Share price (p) | 4,860 | 2,790 |
| Market cap (£bn) | 3.54 | 3.33 |
| PE ratio | 26 | 18 |
| Div yield (%) | 1.1 | 2.1 |
| 5-year growth rates (% pa): | ||
| Sales | 10.1 | 4.4 |
| Pre-tax profits | 6.4 | 8.5 |
| EPS | 5.0 | 10.5 |
| 5-year average (%): | ||
| Profit margin | 22.4 | 13.3 |
| Cash return on assets | 6.6 | 9.2 |
| Cash conversion | 48 | 106 |
| Cap-ex/Revenue | 13.0 | 8.2 |
| Source: S&P Capital IQ | ||
Renishaw generates profit margins to die for, but that does not feed through to an enviable return on capital, which, in the table, is proxied by the free cash return on the gross assets it employs. Perhaps that’s because it spends heavily on its capital account – an average of 13 per cent of sales in the past five years – and consequently turns less than half its accounting profits into cash. That may be a strength or a weakness, depending on whether you see those lovely wide profit margins as a function of the capital spending and a protection against tough times or whether you reckon a fat return on capital is the ultimate arbiter of a company’s success.
Mirror-image comments might be applied to Spectris. Its profit margins are leaner – though still good – and its return on capital better, though not great. Perhaps Spectris does not spend enough on its capital account and, conversely, may be too dependent on acquisitions for growth. The table shows that, on average, Spectris devoted 8.2 per cent of its revenue to capital spending, but that figure includes the £346m it spent on acquisitions in that period. Exclude that and the ratio slips to just 2.8 per cent of revenue, also meaning that Spectris’s capital spending was less than its depreciation charge – small wonder its cash conversion is so high. In contrast, acquisitions are almost unknown for Renishaw.
The moral of this exercise may be that there is more ways than one to skin a cat. In their respective ways both companies are successful and their shares popular with investors – indeed, too popular for the likes of Bearbull. However much I churned the data, instinctively I know I couldn’t find enough value to justify a purchase at current levels. That may mean that Renishaw is now gone for good, but the time may well come when popularity deserts Spectris. It’s one to mark up on the watch list.
