During 2008-9, demand collapsed and UK exporters were forced to slash costs. But three years on, with greater pricing power and leaner structures, profits are hitting record levels.
Take Morgan Crucible. In 2011 it turned in its best performance in a 155-year history on the back of soaring demand from China, Latin America and India. Its niche materials are incorporated into a whole host of applications ranging from military body armour, rail traction systems and hard-disc drives, to medical devices, power generators and aircraft parts.
Revenues from emerging economies are growing by over 20% per year and now account for 25% of the group. Growth is being driven by domestic demand and the migration of Western customers as they transfer production to low-cost countries.
CEO Mark Robertshaw says his target is to boost margins from 12.9% to the “mid-teens” by 2013 and nudge up return on capital employed to 35%. With energy and commodity costs dropping, hitting that target may only require a bit more growth.
Morgan Crucible (LSE: MGCR)
In the four months to April, Robertshaw sounded confident despite sales being marginally behind 2011 – robust ceramic volumes in the aerospace sector were offset by slower growth in the Chinese automotive, wind and solar businesses.
Robertshaw plans to develop products that can be differentiated from the competition and command higher margins. Next he plans to increase the firm’s exposure to the fastest-expanding regions. There should be a boost from US aerospace too as production gears up for the next generation of commercial aircraft – Morgan designs products used in turbine blades.
The City is forecasting 2012 sales and EPS of £1.1bn and 30p respectively, with a 10p dividend (3.5% yield). I rate the stock on ten times EBITA. Adjusting for £215m of net debt and a £135m pension deficit generates an intrinsic worth of 400p per share.
Short term, sales could be hit by the crisis in Europe, a Chinese hard-landing and currency fluctuations. Nevertheless Robertshaw and the Chairman recently snapped up 65,000 shares.
Interims are out on 24 July.
Rating: BUY at 272p (market capitalisation £760m)