Here's something not everyone knows about Birmingham: it lays claim to some of the world's finest engineers. One of them is IMI. Eleven years ago, the firm was written off as a traditional metal basher, selling commoditised widgets and delivering returns below its cost of capital.
Since then, under long-serving chief executive Martin Lamb, it's been transformed into a specialist manufacturer of niche parts. During Lamb's tenure, profit margins have increased from 7.7% to 17%, equity returns have almost trebled to 20% and the shares are up 250%. By any standards, IMI is a class act that Britain can be proud of.
Today, IMI splits itself into two core groups: fluid controls (77% of revenues) and retail dispensing (23%), which together make things such as components for braking/fuel systems, valves for nuclear power stations, controllers for pneumatic doors, and actuators in heating systems and drink dispensers. On 10 November, Lamb reported that trading was on track to hit 2011 targets, despite a slowdown in industrial demand in southern Europe and Britain. Revenue during the first ten months was up by 6%, and the group expects to end December with a "significant reduction" in its net borrowings.
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The worry for investors is what will happen if there's another recession. However, in 2009 the board did a sterling job of managing costs, with margins only falling 1% from pre-crisis levels. This time Lamb says the company is even better prepared and has a "full array of operational measures" to hand should these be required.
IMI is also proving adept at shifting production to low-cost centres. These should account for 55% of output by the end of 2014 (compared with a percentage in the mid-40s today). There is also nowhere near as much unsold inventory in the industry as there was back in 2008, so the effects of any future destocking should not be as severe.
Looking ahead, the firm's target is to boost margins in the fluid controls division to 20% by improving after-market services, while continuing to beef up its emerging-market presence (19% of sales) and enter related areas, such as clean energy, emissions control and life sciences. Bolt-on acquisitions should also keep the share price rolling. There is even an outside chance that this hunter could become prey. Rumours of bids from giants such as GE, Siemens and Honeywell are regularly aired in the press.
IMI (LSE: IMI), rated a BUY by Jefferies
Analysts are pencilling in 2011 revenues and underlying earnings per share (EPS) of £2.1bn and 78p respectively, nudging up to £2.2bn and 82p in 2012. On this basis, I would rate the stock on an earnings before interest, tax and amortisation (EBITA) multiple of ten. Adjusting for the debt and a £188m pension deficit gives an intrinsic worth of more than £10 a share.
Investors will need to keep an eye on what's happening in the eurozone, as well as on cost pressures and foreign-currency risk. That said, IMI manufactures a vast array of top-notch gadgets and even offers a 3.3% dividend yield. Investment bank Jefferies has a target price of £10.50, and fourth-quarter results are scheduled for 2 March.
Rating: BUY at £7.75
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