Today I’m looking at two industrial stocks which I believe could provide a profitable mix of growth and income for investors.
High voltage growth
The first company is power control specialist XPP Power (LSE: XPP). This Singapore-based firm makes AC-DC power supplies and DC-DC converters for electrical equipment.
Revenue rose by 29% to £166.8m in 2017 and this strong performance has continued into the new year. XPP said today that order intake during the first quarter rose 19% to £51.2m, excluding currency effects.
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Group revenue for the period rose by 28% to £46.6m, excluding the impact of shifting exchange rates.
Why I’d buy
I can see a lot to like about this business. XPP’s customers are spread across the industrial, healthcare and technology sectors, in roughly equal proportions. The company’s business model means that it receives an annual annuity throughout the life of a product, which is usually 5-7 years.
Sales have grown by an average of 12% per year since 2012, while earnings per share have risen by an average of about 11% each year over the same period. Cash generation is strong and the group has almost no debt.
A further attraction is that the firm appears to enjoy good pricing power. Last year’s accounts show an operating margin of 19.5% and a return on capital employed of 22%. These figures suggest to me that the firm’s products are of good quality and have limited competition.
XPP shares trade on 21 times 2018 forecast earnings, which isn’t cheap. But there’s a useful 2.3% dividend, too. I think this quality business should continue to deliver for shareholders.
Best buy for income?
FTSE 100 defence giant BAE Systems (LSE: BA) may not be a growth stock but the group’s dividend has risen without interruption for the last 19 years. And last year saw the firm secure a new £5bn contract to supply Typhoon aircraft to Qatar. This should help to secure the future of the group’s air business for a number of years.
BAE is often associated with shipbuilding and aircraft. But the group also produces a much wider range of products, including cyber security and intelligence systems, weaponry, electronic warfare systems and land vehicles.
I see this diversity as attractive as it should help to protect shareholders against short-term headwinds in any one area.
This could be a turning point
BAE’s growth has been pretty humdrum in recent years. The group has also faced a large pension deficit, which stood at £6.1bn at the end of 2016.
However, the outlook does seem to be improving. The pension deficit fell to £3.9bn in 2017 and the group’s order backlog was broadly unchanged at £41.2bn. Major milestones on a number of major contracts helped free up cash, which reduced net debt from £1,542m to just £752m.
Looking ahead, adjusted earnings are expected to be broadly flat this year and to rise by 7% in 2019. Dividend growth is expected to continue at around 3% per year, providing shareholders with an income that should keep pace with inflation.
The BAE share price has risen since it touched 533p in November. But the stock remains under 600p at the time of writing. That gives a forecast P/E of 13.6 and a prospective yield of 3.8%. In my view the shares remain a good buy for long-term income at this level.
