The markets reaction to todays AGM trading statement from Gooch & Housego (LSE: GHH) has been volatile. Indeed, the photonic components and systems manufacturers share price was down more than 20% in early trading today.
But to put that move in perspective, the stock has been a big success, and even todays price around 1,200p is more than 160% higher than it was six years ago. That long move was driven by annual rises in revenue and earnings.
Headwinds
Todays statement starts with the headline:Continued growth despite microelectronic headwinds. In the first four months of the firms trading year, it saw a downturn in demand for critical components used in industrial lasers for microelectronic manufacturing, particularly from China.The news chimes with other recent reports about slowing economic activity in China, so perhaps we shouldnt be surprised.
In the last full trading year to September 2018, around 23% of revenue came from the Asia Pacific region and countries other than the UK, US and those in Europe. So revenue from China falls in that classification, which puts the slowdown in context a bit. But, of course, the decline could gather pace to affect trading in other regions more over time.
To balance the negative news, the company said in the report that demand for fibre optic products and high-reliability fibre couplers used in undersea cable networks has strengthened still further. The company reckons that high-reliability fibre couplers are about to experience a multi-year growth phase.Thats why the company is investing in further capacity to take advantage of its market leadingposition in the industry. The directors think the benefits of the first phase of such growth will arrive in the second half of the firms trading year to September 2019. So we are getting negatives and positives in the same statement.
Cyclicality biting
To add a bit of colour, GHH owned up to havinglong been awareof the risks regarding the inherent cyclicality of the microelectronics sector. It also pointed a finger at the impact of US/ China tariffs. Although demand in the area of microelectronics was up against strong comparatives from trading last year, uncertainty in the Chinese market means stocks will take longer to shift than the directors thought.
The bottom line is the firm expects percentage growth in low single digits overall for the full year to September 2019. So thats not a disaster and growth is still growth. Indeed, the order book is almost 2% higherthan a year ago at 91.4m. However, I think the news today reveals the companys Achilles heel, which is its vulnerability to economic cycles in the sectors in which it operates.
Meanwhile, the forward-looking price-to-earnings ratio stands close to 19 for the trading year to September, and the anticipated dividend yield is about 1%. City analysts following the firm expect earnings to cover the payment more than five times, though, and I reckon high cover like that suggests the directors see plenty of opportunities ahead to invest in growth rather than pay out all the companys spare cash with the dividend. If I had been holding the shares for a long time, Id continue to hold, but to enter a position now, Id demand more of a discount in the valuation. But Gooch & Housego is firmly on my watch list.
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