Shares of quality assurance tester Intertek (LSE: ITRK) have enjoyed a blistering start to the year, up 26% since the beginning of January. And I reckon that the combination of secular tailwinds at its back, the weak pound and internal changes mean this rapid share price appreciation may continue for a long while yet.
The secular tailwinds propelling the company’s growth are the increasing globalisation of product development, sourcing and manufacturing that are constantly under increased regulatory and shareholder scrutiny. This is where Intertek steps in to provide quality assurance at every step of the process, making it a vital link in the risk management system of any multinational firm.
As this is by its nature an international business, Intertek is currently reaping the rewards of the weak pound. In the first quarter of the year, sales rose 14.2% year-on-year with a full 12.4% of this improvement down to currency translation benefits. With little signs of sterling making a recovery any time soon, it certainly appears the company will continue to benefit from this trend in the coming quarters.
Finally, management has been rightfully prioritising growth in the high margin, high growth products division rather than in the cyclical natural resources or trade divisions. Increased attention to this segment is paying off with organic growth of 5.8% in Q1 bolstered by continued acquisitions.
On top of significant growth opportunities, Intertek is also in a great position financially with net debt a reasonable 1.5 times EBITDA, a highly profitable business that produced £318m in free cash flow last year on £2.5bn in sales and operating margins that improved to 16%. All of these characteristics lead me to believe the company’s shares are worth buying right now despite trading at 24 times forward earnings.
The benefits of Brexit
Another FTSE 100 giant whose shareholders have enjoyed 2017 immensely is Croda (LSE: CRDA). Shares of the speciality chemical maker are up 24% to start the year as the weak pound and solid results have increased investor optimism.
While a large part of the 19.1% year-on-year sales increase posted in Q1 was down to the weak pound, organic growth of 4.9% is great to see and points to management’s successful trading strategy. This strategy is to re-focus on its core business, transition from distributor to direct sales model in key regions, and to take advantage of overall market growth through constant product innovation.
The benefits of operating as a major player in a relatively niche industry is that Croda enjoys very impressive pricing power. We see this in the company’s 2016 results where operating margins rose to 23.9% due to continued focus on cost-cutting, a different mix of product sales and the weak pound.
With margins this high the business is also kicking off impressive cash flow, despite heavy capital investments. Last year free cash flow was £155.5m from £1.2bn in sales, which helped keep leverage down at 1.1 times EBITDA. As a major producer of chemicals for personal care products such as make-up, Croda’s performance is tied to that of the global economy. But with high margins and solid growth prospects, I reckon the company’s shares are worth a second look, trading as they are at 22 times forward earnings.
Brexit and the weak pound may be helping Croda and Intertek but it’s also causing myriad headaches for everyone from retail investors on up to giant institutional investors. But the Motley Fool firmly believes this period of extended volatility can be an asset as well as a hindrance, which is why they’ve written a free 5 Step Guide To Surviving Brexit.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.