FTSE 350: Despite strong manufacturing data, electronics stocks carry a price

Indeed, each business within this niche has enjoyed varying degrees of uplift in market value over the past year; none more so than engineering group Renishaw (RSW). A year ago, we noted that sterling’s devaluation after the Brexit referendum had made electronic equipment manufacturers’ goods more competitive on the global stage. This effect was clearly demonstrated in Renishaw’s earnings in 2017 – currency movements helped the measuring tool specialist to book record revenues of £537m for its financial year to June, a headline increase of 26 per cent.

Moreover, Renishaw achieved growth across multiple regions and end markets. For analysts at Numis, this demonstrated the company’s “strong structural positioning in industrial automation, robotics and enabling manufacturing efficiency”. A particularly strong performance from metrology, the largest segment by sales, was echoed in a trading update for the three months to September, which revealed another26 per cent rise in group sales to £142.3m during the quarter on the back of strong orders from consumer electronics clients in the Far East and favourable currency movements.

But in a theme common to the sector, Renishaw’s good recent track record needs to be sustained if its extremely demanding valuation is to be justified. Selling into booming Asian markets is one way to do it, particularly if a reversal in UK manufacturing output data dampens investor sentiment in the sector. 

As currency effects have a habit of coming out in the wash, it’s important shareholders not lose sight of underlying sales figures. Foreign exchange accounted for more than half of the 22 per cent increase in revenue for instrumentation and controls supplier Spectris (SXS) in its half-year to June. Little surprise that the group’s share price performance for 2017 was muted against both its peers in the same period.

Even so, there were encouraging signs of growth in Spectris’s North American markets, while shareholders can look forward to more details on the benefits and costs of ‘Project Uplift’ – the company’s productivity scheme – later this year.

Spectris isn’t alone in its operational overhaul. Morgan Advanced Materials (MGAM), which produces high-tech performance materials for various industrial applications, is now two years into a transformation of its business. An overhaul of its global structure and operational execution has, among other objectives, focused on further investments in automation, research, and its sales teams. A recent trading update pointed to how this might impact revenues and cash generation, revealing an encouraging organic sales uplift of 2.3 per cent for the quarter to October.

Research and development remains a big theme for Halma (HMA). In 2017, improved profitability stemmed in part from the introduction of new product lines, facilitated by the group’s 19 per cent boost to research and development expenditure. The health and safety equipment manufacturer’s astute investment strategy means that new product lines tend to contribute strongly to overall trading.

Moreover, the group has diversified its offering through further acquisitions. Among them was Mini-Cam Enterprises, purchased for £62m in November, which inspects pipeline solutions for waste water systems and fits well with the group’s existing water technologies. A further £23.1m may be paid, based on performance to March 2020. In December, Halma also bought Argus Security and its UK-based distributor, Sterling Systems – specialising in wireless fire systems – for £21m. Management cites rising global demand for these products in both commercial and industrial applications.

In keeping with Halma’s specialist area, its steady performance conjures an air of safety. With consistent trading and a growing product portfolio, the company looks in good nick as it steers its way into 2018. Even so, its valuation assumes no let-up in its stratospheric earnings growth trajectory, although it is equally hard to bet against a stock that has nearly quadrupled in half a decade.