Sales rose by 26.5% to 477.1m at defence firm Chemring Group (LSE: CHG) last year, while underlying earnings rose by 45% to 10.3p per share.
Todays figures are likely to be a relief for shareholders, who stumped up 80m in a rights issue last year. The good news is that this cash influx seems to have been successful. Net debt fell by 43% to 87.6m last year, while underlying pre-tax profits rose by 71.7% to 34m.
Does Chemring now offer a buying opportunity for investors, or is the firms recovery already priced into the shares?
More to come?
Its worth putting Chemrings turnaround in context. The groups share price is still 60% lower than it was five years ago. This years underlying pre-tax profit of 34m is 73% lower than the figure of 125.6m reported in 2011.
Although Chemrings profits may not return to historical levels for the foreseeable future, I believe that profits are likely to continue recovering for some time yet.
Alongside that recovery, cash generation also improved last year. Cash flows from operating activities rose by 115% to 76.4m, while underlying free cash flow was 44.4m, broadly in line with underlying operating profit of 48.5m. These figures suggest to me that Chemring will be able to continue managing debt and gradually rebuilding its dividend.
Analysts expect itsdividend payout to rise to 3p this year, giving a prospective yield of 1.8%. Alongside this, underlying earnings are expected to rise by 15% to 11.2p, putting the stock on a forecast P/E of 15.
Although currency effects gave a boost to Chemrings recovery last year, I believe the shares look reasonable value at current levels, and are likely to deliver further gains.
A bigger and better choice?
If you want to avoid the uncertainty of a turnaround situation, then one alternative to Chemring is sector heavyweight BAE Systems (LSE: BA).
The firms shares have risen by 20% over the last 12months, partly because the weaker pound has provided a significant boost to the value of BAEs US dollar revenues. Management guidance is for underlying earnings growth of 5%-10% this year, which gives a figure of about 40p per share. Analysts expect the groups dividend to rise to 21.3p.
At the current share price of 600p, these forecasts give BAE a 2016 forecast P/E of 15 and a prospective yield of 3.5%. A similar level of earnings growth is expected for 2017.
Is BAE a buy?
BAE made good progress on a number of fronts last year, signing a 2.1bn Typhoon support contract and beginning work on a major submarine project for the Royal Navy. But its worth noting that the groups order backlog fell slightly during the first half of last year, while net debt rose to more than 2bn.
As a shareholder myself, Ive no plans to sell. But I paid much less for my shares, which gives me a higher dividend yield. At current levels, the stock looks fully priced to me. I plan to wait for a better buying opportunity before adding to my holding.
Roland Head owns shares of BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.