Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
While Questor is unashamedly bullish about the long-term prospects for the UK economy, investment opportunities also abound among companies that operate abroad. Indeed, the IMF expects the global economy to grow at a pace more than twice that of the UK economy this year. It currently forecasts growth of 3.2pc for the world economy versus 1.5pc for the UK, as major economies such as the US are expected to continue to deliver strong performances.
Some investors may naturally determine this means they should pivot to stocks which are listed abroad. However, a vast number of FTSE 100 members offer exposure to, and in some cases are overwhelmingly reliant on, the world economy.
In fact, the index’s members typically generate around three quarters of their sales from abroad, and in many cases their market valuations are depressed relative to comparable firms listed elsewhere due, apparently, to ongoing investor apathy towards UK-listed stocks.
For example, just 5pc of FTSE 100 engineering company IMI’s sales are generated in the UK. It is therefore highly dependent on the global economy’s performance, with its revenue split between mainland Europe (38pc), the Americas (30pc), Asia Pacific (22pc) and the Middle East and Africa (5pc).
The firm’s diverse geographical exposure has contributed to its recent upbeat financial performance. Its latest quarterly trading update showed that it was on track to grow organic operating profit (which excludes the impact of acquisitions) by 10pc in the 2024 financial year.
Its performance was aided by higher profit margins, with a cost reduction programme a major contributor to the improvement in the company’s competitive position. The firm stated that it expects efficiency gains to total £15m in 2024 and £7m in the current year, with potential for further savings in future. This should boost the company’s earnings growth rate, the bottom line of which is expected to rise by around 8pc in the current year.
This puts it on a forward price-to-earnings ratio of around 13.8. While this may initially suggest the firm is fully valued given its high single-digit prospective earnings growth rate this year, IMI has produced a 14pc annualised rise in net profits over the past three years. With interest rate cuts in key markets such as the Eurozone and the US set to prompt a period of stronger operating conditions once time lags have passed, the stock offers good value for money in this column’s view.
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Its present market valuation is further justified by the presence of sound fundamentals. For example, the company’s net gearing ratio stood at 55pc at the time of its half-year results in June – in the first six months of its most recent financial year, the firm’s net interest costs were covered over 25 times by operating profits.
A sound financial position provides scope for M&A activity, with the company acquiring internet-of-things specialist TWTG for €25m (£21m) in October. It, and any future purchases, could act as positive catalysts on the firm’s bottom line.
A solid balance sheet and a strong financial performance further provide the capacity for additional share buybacks following the completion of a recent £100m programme. While rising profits mean dividends can follow suit – as evidenced by a 10pc increase in the company’s interim dividend – the stock’s yield of 1.6pc means that the bulk of its total return is likely to be generated from capital growth.
Since first being tipped by Questor in March 2019, IMI has generated a capital return of 81pc. This is 69 percentage points ahead of the FTSE 100 index’s gain over the same period. In this column’s view, the company is in a strong position to deliver further substantial index outperformance.
Its exposure to the world economy means it is well placed to capitalise on attractive growth opportunities, while the prospect of further acquisitions and cost reductions could bolster its earnings growth rate. With solid fundamentals and an appealing valuation, especially when compared with many globally-focused firms listed outside the UK, it remains a worthwhile purchase given its upbeat long-term outlook.
Questor says: buy
Ticker: IMI
Share price at close: £18.22
Read the latest Questor column on telegraph.co.uk every weekday at 5am. Read Questor’s rules of investment before you follow our tips.