Move over, Germany and Sweden. There are several world-class UK engineers in profitable niches supplying a vast array of industries with vital equipment. Dr Mike Tubbs picks his favourites.
When it comes to engineering, few investors would immediately think of the UK. The “Mittelstand”of successful medium-sized engineering companies is widely known as the backbone of the German economy. There are also smaller countries – Sweden being one example – that boast several excellent engineering companies. But there is also a group of British engineering companies who are global leaders in their market niches, the equal of – or superior to –their German counterparts.
Britain’s “Mittelstand”
Engineering is a broad field. This analysis excludes defence-engineering companies (in which the UK is also strong) and the many successful unlisted UK engineering businesses, such as Dyson and JCB. It concentrates on firms in electrical, electronic, mechanical, fluid, automotive and chemical engineering. They are all market-leading specialists with a global presence. In most cases well over 90% of sales stem from outside the UK and the group has a firm footprint in all three main world regions (Europe, the Americas, and Asia Pacific). Such a wide geographical spread of sales reduces the impact of a downturn in any one world region.
As leaders or strong players in their market niches, they should be able to demonstrate high profitability, defined as an operating margin (operating earnings as a proportion of sales, or EBIT/sales) of 14% or more. That gives us the nine companies in nine different sub-sectors listed in the table below. They range in size from AB Dynamics (with a market capitalisation of £0.6bn) to Halma (£7.6bn). The 2018 EBIT/sales ratio stretches from 14.1% to 39.1% for Victrex.
The nine most profitable specialist engineers
We will now briefly describe what each of the nine companies does, their growth records, their dividend yields and records, and the strength of their balance sheets. We will then select the most promising on the basis of their profitability, long-term focus – judged by investments in research and development (R&D) and capital expenditure (capex) – and long-term profitable growth records.
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