Should I Buy IMI?

LONDON -- I'm window shopping for shares again, and there are plenty of goodies for sale. Should I pop IMI  (LSE: IMI  ) into my basket?

Victorian values
IMI is a global specialist engineering company with a heritage stretching back to Victorian times. Contrary to rumor, the British can still do engineering, and do it well, if IMI's recent share price growth is a guide. It was rewarded with promotion to the FTSE 100 in December 2010, and subsequent performance has been solid. Should I buy it?

IMI is up 155% over the last five years, against 9% for the FTSE 100 as a whole. I'm not expecting the share price to keep flowing upwards at that rate, but it was still powering ahead right up to the recent sell-off. Preliminary full-year results for 2012 were pretty solid, or "resilient," in the words of IMI's management. It defied the weaker economic climate to increase revenues by 3% to 2.19 billion pounds, although pre-tax profits rose a wafer-thin 0.8% to 3.66 billion pounds. The dividend was hiked a healthy 8% to 32.5 pence. The balance sheet is strong, with net debt of 144 million pounds, and IMI is launching a share buyback program of up to 175 million pounds over the next 12 months. Chairman Roberto Quarta was cautiously optimistic, noting that "while the global macro-economic outlook remains mixed, we are confident of delivering further progress in 2013, supported by higher growth in the emerging markets and an improving contribution from recently introduced new products."

Long and sweet
IMI is looking to grow through acquisitions, which always adds a little risk, although recent additions Remosa and InterAtiva have been encouraging, raising margins and boosting growth prospects. Management has identified a "sweet spot" in its chosen specialism fluid technology and expects to benefit from long-term megatrends of climate change, resource scarcity, urbanization, and an ageing population. It hopes to generate a sweet 75% of its revenue from this spot, up from the current 58%.

Like many stocks, IMI is a fair bit cheaper than it was last month, when it looked a little pricey at around 18.5 times earnings. It looks better value today, at 14.2 times earnings. Forecast EPS growth looks modest, at 4% this year and 9% in 2014. Operating margins look decent at 14%, and although this fell from last year's 15.5%, this should improve as the company clears a backlog of lower margin products. It generates a whopping 90% of its sales outside the U.K., so has more than its fair share of currency risk. On the other hand, it also has plenty of exposure to emerging markets growth. Recent falls in raw material prices could help, by cutting its costs.

Buy British
Dividend seekers won't be overwhelmed by its 2.7% yield, below the FTSE 100 average of 3.3%, although they will be encouraged by the recent 8% hike. Covered 2.6 times, there is plenty of scope for progression. IMI looks a solid buy to me, especially if market turbulence trims its valuation a little further. Put your faith in British engineering.

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9/12/2014 11:43 AM
IMI $1313.75 Up +2.75 +0.21%
IMI CAPS Rating: No stars

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