It’s official, the UK’s manufacturing sector is in full-blown recovery mode.
According to The Chartered Institute of Purchasing & Supply, the UK manufacturing sector has reported yet another month of expansion during May. In addition, hiring within the sector continued and for the 13th month in a row firms took on more staff.
According to institute figures, the manufacturing sector is enjoying a broad-based recovery and is seeing an influx of international orders from the US, Asia, Canada, Europe, the Middle East and New Zealand.
So, here are three ways you can profit from this trend.
The big daddy
Rolls-Royce (LSE: RR) (NASDAQOTH: RYCEY.US) is undoubtedly the big daddy of UK manufacturing. However, the company has recently come under pressure from investors for a number of reasons.
In particular, the iconic engineering company has been accused of issuing bribes to foreign officials and is now under investigation by the Serious Fraud Office. What’s more, the company’s defence business is reporting falling profits as governments around the world slash defence spending.
Nevertheless, Rolls’ reputation for excellence continues to draw in customers. Indeed, despite issuing a downbeat outlook at both the company’s full year 2013, and first quarter 2014 results, the company’s order book expanded 19%, to £71.6 billion during 2013. Almost 50% of these orders came from emerging markets.
With this order backlog, Rolls-Royce has around four-and-a-half years of revenue locked in and the company is cutting costs to streamline production and boost profits.
After recent share price declines, Rolls’ shares now trade at a forward P/E of 16, which looks cheap considering the company has revenue clarity for the next few years.
Fluid Power
Birmingham headquartered IMI (LSE: IMI) is a specialist engineering company. IMI designs, manufactures and services bespoke solutions that control the movement of fluids, an essential service for many industries.
And the company has attracted plenty of attention from peers who want to get in on the action. For example, Warren Buffett’s Berkshire Hathaway acquired IMI’s Beverage Dispense and Merchandising for £690 million last year. This cash which was promptly returned to investors.
Further, there is now increasing speculation that fellow fluid control engineer Weir Group could make a move on IMI. Weir has been looking to acquisitions to boost growth and the company has tried twice to buyout Finnish rival Metso. However, both passes Weir has made at Metso have been turned down and it is now believed that the company is looking elsewhere for deals.
Looking for a target
Finally, there is Warwickshire-based Melrose (LSE: MRO). Melrose operates a private equity-like business model. The firm acquires failing or struggling industrial companies and bringing in new talent and fresh capital. The end goal is to improve the acquired company’s performance, before selling it on for a profit, returning the cash to investors.
And this is a business model that Melrose has been able to execute perfectly in the past. Indeed, during the space of the last year alone, Melrose has sold off four turned-around business for a total of just under £945m, a three-fold return on investment. Management declared a special dividend of £600m after these sales.
Now, with the economy improving, Melrose is on the prowl for its next acquisition, planning to spend around £2bn and hopefully achieve the same returns as it has done in the past for shareholders.
