Should I Invest in IMI?

LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment, and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities, and today I'm looking at IMI (IMI 1.28%), an international engineering company.

With the shares at 1140 pence, IMI's market cap is 3,666 million pounds.

This table summarizes the firm's recent financial record:

The recent half-year results showed steady progress at IMI, which operates in around 75 countries, employing about 14,700 people to produce valves and flow-control equipment for liquids in industries such as energy, transport, beverage dispensing, heating, ventilating, and air conditioning.

Substantial aftermarket sales arise because of the firm's often bespoke-engineered solutions, which ensures a steady revenue stream. The company aims for niche market leadership in fluid technologies, where it sees growth drivers such as climate change, resource scarcity, urbanization, and aging populations. When these elements come together, the firm often achieves higher margins, higher growth, and greater business resilience, according to the directors.

With IMI having entered the FTSE 100 for the first time in December 2010, there's evidence that the company's strategy is working, and that could bode well for the total-return prospects of the shares.

IMI's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:

1. Dividend cover: Earnings covered last year's dividend around 2.7 times. 4/5

2. Borrowings: Net gearing is about 39%, with borrowings around 80% of earnings. 4/5

3. Growth: Revenue and earnings have been rising, with cash flow struggling to keep pace. 2/5

4. Price to earnings: A forward 12 looks fair compared with growth and yield forecasts. 3/5

5. Outlook: We see satisfactory recent trading and offer a cautiously optimistic outlook. 4/5

Overall, I score IMI 17 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return, going forward.

Foolish summary
Borrowing seems under control, and earnings cover the dividend well. Trading has been good recently, but I'm interested to see the full-year results, due in March, to see if cash flow is keeping up. The outlook is encouraging, but growth expectations seem priced into the shares.

Although IMI scores quite well, I'm not seeing a bargain, so I won't be investing right now. But I'm enthusiastic about other FTSE 100 companies, and with one selection, I find myself in the company of master investor Warren Buffett. In fact, the company in question is the only U.K. company in which the American financial wizard currently holds shares. You can find out why in the Motley Fool's report "The One U.K. Share That Warren Buffett Loves." For a limited period, the report is free, so, to download your copy and find out the identity of the one U.K. share that is currently screaming "buy" to so many, click here.