Quality control assurance company Intertek (LSE:ITRK) released positive annual results yesterday with a 5.2% increase in annual operating profit for 2019. Its share price rose on the news.
Group revenue increased by 4.8% to £2.99bn raising adjusted operating profit to £513m. While overall, it enhanced organic growth through acquisitions. The FTSE 100 company also increased its annual dividend to 105.8p a share, bringing it up to a 1.9% yield.
In its annual report and prior to the coronavirus outbreak impacting operations, Intertek forecast good organic growth in revenue, products, trade and resources for the year ahead.
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However, it’s now confirmed that COVID-19 will affect its customers’ supply chains because many of them source their equipment from China. It’s still too early to tell how badly this will affect Intertek in the coming months, as travel restrictions are also likely to pose a challenge.
But looking beyond that, the global quality assurance market in which it operates is worth $200bn and only a quarter of this is outsourced currently, which gives Intertek the potential for plenty of future growth. However, its price-to-earnings ratio (P/E) is 31, which makes me think the good news is already priced in to the share price and with the coronavirus outbreak not yet contained, I’ll be avoiding this share for now.
Prepare to defend
Government defence contractor BAE Systems (LSE:BAE) remains on my radar though. It recently posted full-year earnings growth of 7%, while annual sales rose over 10% to £20bn and operating profit climbed 18%.
BAE has a £1.9bn pension shortfall but intends to pay off more than half of it in a debt-funded payment later this year.
Its P/E is around 13, which I consider undervalued and earnings per share are 46p. It also offers a reasonable dividend yield of 3.8%, covered twice by the company profit available.
Coronavirus, mass migration and political crises around the globe mean uncertainty is high in many countries. But in my opinion, defence and technology will remain at the top of their budget agendas for some time to come, along with increased spending on security.
A court ruling eight months ago stated that Britain had granted arms export licenses unlawfully to Saudi Arabia. This paused new licenses but didn’t affect existing exports. As BAE Systems was already providing arms to Riyadh through British government contracts, it continues to do so, despite a backlash.
Of course, you may want to avoid this ‘sin stock’ on ethical grounds if you’re aiming for a totally ethical portfolio.
Acquisitions and future growth
But if not, I see it as having great potential. It recently made three bold acquisitions to strengthen its aerospace technology — Prismatic, a solar-powered drone manufacturer, along with Collins Aerospace’s GPS division and Raytheon’s Airborne Tactical Radios unit. These acquisitions haven’t been factored in to the company’s forecasts of a mid-single-digit rise in earnings in 2021.
The potential for further growth remains and CEO Charles Woodburn said there’s an opportunity to sell more Typhoons to Germany and other countries. He also confirmed potential Brexit restrictions on low-skilled EU workers, shouldn’t have much of an impact on its workforce.
The BAE share price has risen 11% in the past three months and 31% in a year. I’ve liked the firm for some time now and I still think it’s a good addition to a long-term investor’s income portfolio.
