Almost all of us use smartphones and mobile data these days. Data volumes on mobile networks are rising rapidly across the world and speeds are on the up.
All of this requires a lot of engineering, so why have profits slumped at data communications testing specialist Spirent Communications since 2012?
One reason may be that investment in new testing systems tends to happen ahead of consumers starting to use the technology. A second problem is that Spirent’s customers haven’t spent as much as they were expected to. The market has been consolidating, reducing the number of independent operators. In the meantime, technical requirements have changed and Spirent has had to adapt its product range.
The impact of the changes is clear: while revenues have continued to rise, operating profit has collapsed from £108m in 2012 to just £10.1m last year. The firm’s operating margin has fallen from 23% to just 2.1%. But the tide may be turning. Spirent’s net profit is expected to rise from £13.3m in 2015 to £35.1m in 2016.
Spirent shares have bounced back from the market sell-off at the end of last year. Forecasts have been upgraded and Spirent is the second biggest StockRank mover of the last 30 days, up 37 places to a StockRank of 91.
With strong quality and momentum scores, Spirent looks well positioned to become the high flyer many investors thought it could become three years ago. Is this really possible?
Should we question the price tag?
As a value investor, Spirent is not the kind of share I would normally buy. But the group’s apparently demanding valuation is backed by a solid balance sheet, decent cash flow and a progressive dividend.
This isn’t a reckless punt on a blue sky tech growth story. Spirent is a real business. Although the shares don’t look cheap, all the key value ratios make sense and are consistent with each other:
A dividend yield of 3% is reasonably attractive for a company of this type. It’s also worth noting that free cash flow exceeded earnings last year. This seems to be because while Spirent recorded $32m of exceptional costs last year, most of these were non-cash impairments. The underlying business delivered a 30% rise in operating cash flow and $35m of free cash flow.…
