Global GDP and steel demand seem to be joined at the hip. The recent economic slowdown triggered an 11% drop in European steel output in July and August. Destocking has added to the pain by hitting US and South American volumes. This has damaged Cookson the world's leading supplier of heat-retardant ceramic pipes, valves and container linings used in foundries and steel mills.
The company was forced to issue a profits warning on 8 October, thanks to a second-half-year performance that will be materially below expectations. But I think the gloom has been overdone.
For starters, the economy is not falling off a cliff the European Central Bank's promise of "unlimited" bond buying has removed some of the recent fear. Trading at Cookson's two units providing niche consumables for the electronics (29% of sales) and precious metals (11%) industries remains on track.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
And net borrowing is set to fall significantly, from £461m at June, to below £400m by the year end representing a comfortable debt to equity level of around 1.3 times earnings before interest, tax, depreciation and amortisation (EBITDA). This should give the firm enough scope to maintain a 4% dividend yield alongside dividend cover of three times.
The board has responded promptly to the temporary slump by imposing a hiring freeze, axing agency staff and cancelling overtime. One of the group's two solar factories in China is being shut. Should the backdrop deteriorate further, more cost-cutting measures will be implemented.
The recent profit warning should not stop the board from demerging its rapidly expanding electronics arm. This unit supplies all the solder for Apple's iPhone and iPad, as well as for other tablets and smartphones. A demerger should unlock value by removing the discount attached to the shares when compared with a sum-of-the-parts valuation.
Cookson (LSE: CKSN), rated a BUY by Panmure Gordon
The City is forecasting 2012 turnover and underlying earnings per share (EPS) of £2.57bn and 68p respectively, nudging up to £2.62bn and 72p in 2013. The stock trades on a p/e of just 8.1, which looks far too cheap for a science-orientated business with entrenched market positions. Its products are critical to the quality and efficiency of its customers' manufacturing processes, and also represent only a small part of their total cost.
Given all this, I would rate the company on a nine times EBITA multiple, which, adjusted for net debt and a £81m pension deficit, generates an intrinsic worth of about 625p a share.
There are a few risks to watch for, including changing raw materials prices and foreign-exchange fluctuations. But these are more than baked into the share price. Panmure Gordon has a price target of 680p.
Rating: BUY at 550p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more information.
-
M&S and Tesco among those warning of a £7bn Budget hitSeventy-nine UK retailers have written to Chancellor Rachel Reeves about possible price rises and job cuts - here is what it means
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
-
Somero: trading this overlooked bargainFeatures Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
-
How to find big profits in small companiesCover Story The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge explains how to find the market’s top tiddlers.
-
The hidden gems on Aim, London's junior marketFeatures Aim, London’s junior market, is risky – but you can find solid stocks at low prices. Scott Longley reports.
-
Is Aim finally coming of age?Features The Aim market of mostly smaller companies has traditionally been seen as a bit of a backwater. Is it time to change that view? Matthew Partridge talks to Paul Latham and Richard Power of fund management company Octopus.
-
Three Aim-listed firms that will thrive in a post-Brexit worldOpinion Matt Tonge and Victoria Stevens of the Liontrust UK Smaller Companies Fund pick three Aim-listed firms that will survive Brexit turmoil.
-
Fetch! The Chinese small-cap stocks to buy in the Year of the Dog
Opinion Each week, a professional investor tells us where she’d put her money. This week: Tiffany Hsiao of Matthews Asia selects three Chinese small-cap stocks with exciting potential.
-
Small and mid-cap stocks with big potential
Opinion Professional investor Guy Anderson of the Mercantile Investment Trust selects three small and medium-sized firms with promising prospects that the market has missed.
-
Get cheap, reliable growth from smaller companiesFeatures One of the most reliable long-term investment trends is the long-term outperformance of smaller companies over blue chips. Max King picks some of the best ways to buy into this growth.
