UK Edition
Questor: yes, Spirent has an awful lot going for it. But here’s why we will not be investing
Questor share tip: the telecoms testing firm is gearing up for a 5G boom but the valuation may have got ahead of itself
A recent surge in profits, net cash on the balance sheet, healthy returns on capital and a strong competitive position in a potentially huge market all mean that Spirent has a lot going for it.
The company is a leader in telecommunications networks testing equipment and, now that the rollout of 5G mobile networks is upon us, the future could be bright.
But this column does have some niggling doubts – not that they are the fault of the company or its relatively new chief executive, Eric Updyke, whose strategy to try to build recurring revenue streams to iron out some of the wrinkles in the firm’s historically volatile earnings is very sensible.
Spirent’s shares have risen by 43pc over a year and by 150pc over five. The market has not missed Spirent’s 5G potential.
Moreover, a trading update last month said revenues for 2019 would be 5.5pc higher at $503m (£387m) – but that is only 5pc higher than they were in 2006 (although changes to the business and restatement of the accounts mean some care is needed with that comparison).
In addition, the firm’s profit-and-loss account has historically swung from profit to loss to profit as it has ridden product cycles up, down and then up again.
A forecast price-to-earnings multiple of more than 25 prices in a lot of good news and not much by way of bad. The company is investing $4m in staff and sales and marketing to get ready for a 5G boom, so if demand does not quite come through on time there could be an earnings stumble for which the valuation may not be prepared.
Earnings estimates have already slipped a bit on that $4m plan, from 9.1p a share to 8.5p for 2019 and from 9.7p to 9.1p for 2020, but the stock’s heady valuation requires upgrades rather than downgrades.
More tangibly, Ericsson, the Swedish mobile telecoms equipment provider, and two American silicon chip makers, Skyworks and Xilinx, have all cautioned this month that their 5G business is developing more slowly than expected.
Their share prices lost ground on the news. Whether this is down to the ongoing ruckus over the involvement of China’s Huawei in 5G networks, wider trade matters or something else entirely, this column will – very reluctantly, given its skill-set – give Spirent a wide berth for now.
Questor says: avoid
Ticker: SPT
Share price at close: 216p
Update: AG Barr
It is way too early to do a victory lap, especially as shares in AG Barr are still a touch below our entry price in August last year, but last week’s upbeat trading update suggests we may at least be on the right track.
A wet summer, carbon dioxide shortages and the sugar tax combined to force last July’s uncharacteristic profit warning, but our thesis that this was a blip – and therefore a buying opportunity – looks valid for now.
- Sign up to our new City Intelligence newsletter for incisive comment on the day's biggest business stories
- Sign up to the Telegraph's Questor WhatsApp group for daily alerts and exclusive audio updates
- Read Questor’s rules of investment before you follow our tips
Management’s focus on maintaining prices and not dashing for volumes seems to be working and the core Irn-Bru brand returned to growth in the fourth quarter. Recovery plans are being implemented at Rockstar, the energy drink, and Rubicon, the exotic drinks brand.
Meanwhile, a strong balance sheet and robust cash flow mean we can wait and see what develops, even in the knowledge that Scotland’s planned glass and plastic returns scheme could be another near-term complication.
It feels like Barr is capable of being bubbly again.
Questor says: hold
Ticker: BAG
Share price at close: 596p
Update: Cobham
Shares in Cobham, the aviation and defence electronics specialist, ceased to trade last month following the successful 165p-a-share bid from Advent International, the private equity firm.We have pocketed a double-digit gain, although there is a chance that Advent got itself a bargain.
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.