This high-tech instruments manufacturer may have announced solid results recently but its shares are nonetheless over-valued. Don’t wait around in the hope of a takeover bid from a larger rival – sell now, says Paul Hill:
Oxford Instruments (OXIG), tipped as a BUY by The Daily Telegraph
Last week, Oxford Instruments, which provides high-tech tools for industry and research, released solid annual results that met City hopes. Underlying profit rose 88% to £7.5m from £4m last time, while revenues from continuing activities rose 21% to £162m. Despite headwinds from the weaker US dollar and Japanese yen, and increased copper prices, adjusted EPS rose from 3.9p to 9.6p for the year, with the dividend unchanged at 8.4p.
Oxford Instruments was among the first technology firms spun out of Oxford University more than 40 years ago. It started life making super-conducting magnets for imaging machines, but following years of under-achievement it gained a reputation for being unable to make the most of its research. Two years ago, a new CEO, Jonathan Flint, was recruited to turn things round. The firm withdrew from unprofitable products and decided to focus on high-growth sectors – targeting emerging nanotech and biotech markets in particular. Its aim is to double turnover and raise operating profit margins from 5% to 14% over the next five years.
However, the shares are over-valued. Some of the world’s most respected corporations are already all over these nascent sectors. Giants such as Intel, IBM and General Electric spent $3.8bn in these areas alone in 2004. For a comparatively small business like Oxford Instruments to succeed against these behemoths, it would have to develop something pretty special. Moreover, last year, much of the firm’s 21% top-line growth was based on the positive impact of newly introduced European legislation on hazardous substances. This beneficial effect is expected to diminish going forward.
Finally, the stock is already priced for perfection. At 302p, the shares trade on a current year p/e ratio of 28.7 times, which looks expensive. I would value the shares on a 20-times multiple – generating a fair value of 210p, or around 40% less than today. It also has a £31m black hole in its pension scheme, which is hefty for a company with only a £150m market capitalisation – this will undoubtedly drag on future earnings and cash flow.
Oxford Instruments could be taken over by a larger competitor, but at 302p I’d advise shareholders to take profits now.
Recommendation: TAKE PROFITS at 302p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments