Encouraging H1 numbers from Somero
Encouraging H1 numbers from Somero today. Turnover rose 12% to $39.7m. This not the standout top line growth that we have come to expect from this company over the past 5 years, but it is still v good compared to most other companies as its all organic. Standout performers were N America, which is c70% sales, rising 24%. Europe, China and Australia were also strong. Korea was v weak as was LATAM. Luckily the 2 largest geographies N America and China have made up for weakness in other areas. One must be mindful that a US slowdown would really hurt Somero.
The good news is that despite weaker trend growth (ie positive, but less positive than previously) margins have still expanded. GMs were 56% vs 55% driven by price increases. While EBIT margins increased to 26% from 23.5%, despite investment in selling expenses and people. So that's positive.
Diluted EPS was 12c vs 9c. The interim dividend has been raised 32% to 2.5c
The balance sheet remains in decent shape with $11.1m of net cash, but I don't expect this to be utilised much as management's mind is still fresh with the horrific commercial downturn of 2006-09. In a cyclical business such as this they recognise the value of cash on the B/S.
The outlook is fairly pragmatic expecting further profit growth this year driven by backlogs at their customers in N America. Management expects some recovery in international markets like Korea and the Middle East and a meaningful recovery in LATAM in H2.
Looking at numbers- revenue was split 50:50 in h1 : h2 last year and profits fractionally stronger in h2. If we therefore just double the h1 number (in an effort to be conservative) that would mean c24c of diluted EPS. This would translate into c18p of EPS and mean a PE of 9x. Given growth remains ok, I think this share has space to rerate marginally from here, although I expect most of the price appreciation to be driven by any further EPS growth in 2017. Looks ok for now. I remain a holder.
As usual please DYOR.
Another good update. I have been holding this for a while now and following a lot of the comments on here with most people feeling very positive about the company. One negative that continually comes up is that this is a cyclical stock.
I am reasonably new to investing and only own a handful of stocks so my experience of holding these types of cyclical stocks is limited. I like to take a long term view of investing so my aim is to hold these for the long term but am unsure as to how to handle a downturn when related to Somero Enterprises Inc (LON:SOM) when one comes.
My preference would be to just hold this through any downturn and hope that they weather any storms. They seem to be in a much stronger position this time around compared to 2008 with more cash, stronger cost control and management experience of handling such a downturn.
Does anyone have any advice or comments as to how they would manage this investment (or cyclical stocks in general) as a long term investor?
Would they try to sell at any signs of weakness and what would these signs be in order to prompt a sell? Or, would they just hold through any downturn?
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