A touch of Warren Buffett’s philosophy

The firm’s strategy revolves around the theory that small and medium-sized enterprises (SMEs) can flourish within the umbrella of a larger organisation. There’s a touch of Warren Buffett’s philosophy in that approach, in my view. Buffett is known for giving the businesses within his Berkshire Hathaway conglomerate a great deal of autonomy. He hires good managers and lets them get on with it. As long as the cash keeps rolling in, and the enterprises remain prosperous and ethical in their dealings, he’s happy.

Cohort owns five businesses: Chess Technologies offers systems for detecting, tracking, classifying and disrupting naval, land and air threats; EIDmakes advanced communications systems for the defence and security markets; MASS focuses on electronic warfare, information systems and cybersecurity; MCLdesigns and integrates communications and surveillance technology, and offers support and training for UK end-users including the Ministry of Defence (MOD) and other government agencies; and SEA is an electronic systems and software house operating in the defence, transport and offshore energy markets.

The directors insist that each business has “high growth potential.” But last year, Cohort said “strong” pressures on public expenditure in the UK and “in many other markets” were keeping demand for the firm’s services suppressed. Nevertheless, the outlook statement was upbeat with the directors saying that there was a concentration of opportunities for the year ahead that was larger than normal.

A decent outcome and a positive outlook

So here we are a year later and it’s interesting to see how trading actually panned out for the company over the 12-month period to 30 April. Today’s full-year report reveals to us that revenue rose 10% compared to the year before, adjusted earnings per share shot up 16%, and the order book grew 84% to almost £190m. Cohort has been trading well, helped by a better-than-expected contribution from its December 2018 acquisition of a majority stake in Chess Technologies.

The directors slapped 11% on the total dividend for the year, signalling a decent outcome against last year’s expectations. Indeed, the company won “all” the large order opportunities it pitched for, “both renewals and new.” It seems to me that Cohort is good at delivering surprises to the upside for shareholders, and in one reassuring measure, it has managed to increase the dividend every year since it arrived on the stock market in 2006.

Cohort also announced today the winning of a £4.79m contract to supply services for Electronic Warfare Operation Support (EWOS) to an export customer. Operational progress continues at pace, and there is plenty of reason to expect the “strong” order book and pipeline of order prospects to deliver further gains in the year ahead.

At 430p, the share price is just over 20% higher than it was around this time last year, which throws up a forward-looking earnings multiple a little below 12 for the current trading year and an anticipated dividend yield around 2.4%. To me, the stock remains attractive.

The post Why I’d put £2,000 into this dividend growth stock for my retirement portfolio appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Cohort. 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.

One of my favourite small-cap stocks is rail and transportation data specialist Tracsis (LSE: TRCS). Shares in this £179m software firm have risen by 252% over the last five years, compared to a gain of just 18% for the FTSE 100.

Tracsis shares were up again on Tuesday, gaining 10% after the company said that profits for the year ended 31 July were expected to be ahead of market forecasts.

The company’s products and services are designed to help transport operators monitor and manage their resources. Examples include data collection from road and rail infrastructure, traffic monitoring, rail crew rostering and a wide range of other specialist services.

Why I like this so much

One of the company’s strengths is that many of its services are quite ‘sticky’. Competition is limited and once a service is installed, it becomes difficult for the customer to switch to a rival provider.

In fairness, another of Tracsis’s strengths is that it seems to be very good at what it does. So customers don’t want to leave very often.

The company’s business has expanded through a mix of organic growth and targeted acquisitions. Net profit has risen from £2.1m to £3.7m over the last five years. The group has also consistently maintained a net cash balance. This rose from £15.4m to £22m last year, demonstrating the strong cash generation of this business.

After today’s gains, I estimate that the shares trade on about 25 times forecast earnings. This isn’t cheap, especially as the dividend yield is less than 0.5%. But the growth record of this business suggests to me that it should continue to deliver. Although I’d prefer to buy on the dips, this stock could still be a good long-term buy.

Defensive profits

My next stock is a small-cap engineering business whose share price has doubled over the last five years.

Cohort (LSE: CHRT) is made up of four engineering companies operating in the defence and industrial sectors. Each firm retains a high degree of independence but benefits from a network of financial support and opportunities to share information.

This conglomerate business model is unfashionable these days. But Cohort’s track record suggests to me that, with good management, it can be very effective. The group’s adjusted operating profit rose by 7% to £15.6m last year, while its operating margin increased from 12.8% to 14%.

Net cash rose from £8.5m to £11.3m and shareholders enjoyed a 33% hike to the total dividend, which was lifted to 8.2p per share.

Order book growth?

One disappointment was that Cohort’s order book fell by 25% from £136.5m to £102.5m last year. The company says this was down to delays rather than a shortage of opportunities, and expects a high level of bidding this year.

Analysts covering the stock are taking a cautious view and have pencilled in a 4% increase in earnings for 2018/19. This may not seem very impressive, but the shares currently trade on just 12.5 times forecast earnings and offer a 2.3% yield.

In my view, this valuation suggests that the stock is priced for bad news. I believe good news is more likely. If I’m right, the shares could perform strongly from here. I rate them as a buy.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort and Tracsis. 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.

The firm operates in the defence sector and markets related to that, an area in which trading conditions have been tough for some time. Yet Cohort has been holding its own and delivered some impressive dividend increases over the past few years:

The dividend has grown more than 95% over four years, which is impressive, and I think there’s much more to come. Cohort’s strategy is based on the core belief that small and medium-sized enterprises (SMEs) can prosper when they are in a larger group. The firm owns four “innovative, agile and responsive” businesses (EID, MASS, MCL and SEA), which each have “high growth potential.”

A difficult trading environment

However, in today’s full-year results report, Cohort said that although the international and domestic security environment calls for greater resources to be devoted to defence and counter-terrorism in the UK and other countries, “strong” pressures on public expenditure in the UK and “in many other markets” are keeping demand for the firm’s services suppressed.

But today’s figures don’t look too bad. Revenue was broadly flat for the year compared to last year and adjusted earnings per share moved up just over 7%. The closing order book moved down 25% to £102.5m, but chairman Nick Prest said that it “provides a reasonable underpinning for the current year” when considered alongside contract wins since the end of the trading year and the firm’s pipeline of prospects. Lower order intake arose during the year because of “delays rather than losses or a lack of opportunities.”

Confidence in the outlook

Looking ahead, the directors said that there is a larger-than-normal “concentration of opportunities” for the current year and they expressed their confidence in the outlook by pushing up the total dividend by 15%, which I reckon is a figure worth noting.

City analysts following the firm expect earnings to increase 2% in the current year and 1% next time. Meanwhile, at today’s share price close to 357p, the forward price-to-earnings (P/E) ratio for 12 months to April 2020 sits just under 12 and the forward dividend yield is a little higher than 2.7%. Those forward earnings should cover the payment a healthy-looking three times or so.

It would be hard to make a case for the firm being overvalued and I think if trading conditions improve in the future and forward earnings estimates crank up, we could see an upwards valuation re-rating materialise. Meanwhile, with the firm’s operations ticking over in the current trading environment, I reckon it’s worth collecting that rising dividend while we wait.

The post Why I’m tempted to invest in this dividend growth stock for retirement appeared first on The Twelfth Magpie.

More reading

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort. 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.

The fruits of the company’s endeavours are divided between two divisions: TriConnex, which creates and connects energy, water and fibre networks for the residential and commercial sectors; and Tamdown, whose services include building highways and drainage systems for the same sectors.

The fact that Nexus provides such essential building works offers a clear layer of earnings visibility. Indeed, even in the current patchy climate for the domestic construction industry it continues to add new business. The firm announced this month that its order book stood at £225m as of the close of February, an 11% improvement from levels seen just three months earlier.

But this is not the only reason to be confident over future profits generation thanks to its robust position within the country’s building sector. Nexus customers include nine of the country’s 10 biggest housebuilders, and with erection rates set to keep rising thanks to the UK’s yawning supply shortage, the company can look forward to sustained revenues expansion from this one segment.

Nexus is expected to throw out a 14% year-on-year earnings improvement during the year to September 2018, and to follow this up with a 17% rise in the following period.

This leaves the AIM-quoted business dealing on a forward P/E ratio of 11.7 times, and a corresponding PEG reading of 0.8. Dirt cheap on paper, this is eye-poppingly low for a stock with as excellent a long-term profits view as Nexus.

Defence dynamo

Cohort (LSE: CHRT) is another business that those seeking dependable profits growth in the years ahead should pay close attention to.

The defence sector is a traditional safe haven for those seeking profits growth over a sustained period. Contract timings may sometimes be lumpy and result in a little earnings turbulence now and again. But over a long-term time horizon, broader armaments demand moves relentlessly higher, reflecting mankind’s desire to wage war as well as to protect itself from external threats. And this in turn supports steady sales growth for the sector’s major players.

And while the UK defence sector may have experienced no little pressure more recently, Cohort has managed to overcome the worst of these problems by concentrating on key focus areas like submarine building and cyber security, on which the government continues to spend vast amounts.

Cohort itself boasts a long record of unbroken annual earnings expansion and City analysts expect this record to continue with rises of 4% and 6% in the years to April 2018 and 2019 respectively.

This leaves the business dealing on an ultra-low forward P/E multiple of 11.8 times. Given its terrific record of relentless earnings growth, not to mention the possibility of fresh M&A action now that its EID and MCL units have been fully welcomed into the fold, I reckon this makes the business look particularly cheap.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort. 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.

Strong underlying gains

When a company is going through a major period of change, adjusted accounts showing only continuing operations can be very useful for investors. These numbers provide a snapshot of progress that strips out all the ‘noise’.

Today’s 2017 accounts from TT Electronics (LSE: TTG) are a good example. This £350m electronic component manufacturer sold its transportation division last year in order to focus on its higher margin product lines such as current sensing, circuit protection and signal conditioning.

TT’s figures for underlying performance show sales from continuing operations rose by 8% to £360m last year, while operating profits measured on the same basis rose by 18% to £24.3m. Adjusted earnings per share were a whopping 40% higher, at 10.9p.

When profits rise faster than sales, this usually indicates rising profit margins. That certainly seems to be happening here. The group’s operating margin from continuing ops rose from 6.2% to 6.8% last year. Return on invested capital, one of the company’s preferred measures of profit, rose from 9.2% to 10.6%.

More change coming

Last year’s disposal left the company flush with cash, and this hasn’t been left idle for long. In February, TT announced it had made a successful offer to acquire specialist electronics maker Stadium Group for a cash payment of £45.8m, plus net debt of £11.8m.

Today’s accounts show net funds of £47m, suggesting that the acquisition will leave the firm with a modest net debt position. That doesn’t concern me, given the group’s stable profits and the potential for cost savings when Stadium’s operations are integrated.

Analysts’ forecasts for 2018 put the stock on a P/E of 18, but I expect these estimates to rise when the Stadium acquisition completes and TT’s management provides updated guidance. I’d rate TT Electronics as a long-term buy at current levels.

A stealth growth stock

One company you may not have heard of is Cohort (LSE: CHRT). The group owns a selection of engineering, software and consultancy businesses which operate mainly in the defence sector.

Areas in which the group operates include cyber security, electronic warfare, communications and surveillance. The logic behind Cohort’s expansion seems to be that the companies it buys will enjoy cross-selling opportunities and access to new markets as part of a larger group.

I can see the case for this, although the evidence so far is somewhat mixed. The group’s operating profit margin has fallen from 11.8% in 2013 to just 0.9% last year. Return on capital employed has slumped from 14% to 1.2% over the same period.

A turning point?

In fairness, I think these isolated numbers probably mask a more attractive picture. The group’s acquisitive growth has been funded without issuing a lot of new shares, and while maintaining a net cash balance.

However, there’s no doubt that progress will be required to justify a higher share price. Analysts expect the group’s adjusted earnings to rise by 6% to 29.1p per share this year. That puts the stock on a forecast P/E of 12.7. There’s also a prospective yield of 2.2%.

This valuation seems about right to me, but if you view this as a long-term growth story, then the shares could be worth considering.

The post 2 stocks I could buy today and hold until retirement appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort. 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.

Historical highs

Less than a decade ago shares in AIM-listed Scapa Group (LSE: SCPA) were changing hands for less than 10p each, but after delivering very strong and sustained levels of growth over the years, they now trade at more than 40 times that value. In fact, for a brief moment last summer, the share price closed above the 500p mark for the first time in the company’s history, before drifting lower to today’s levels around 470p.

The group based in Ashton-under-Lyne, near Manchester, is a global supplier of bonding solutions and a leading manufacturer of adhesive-based products for the Healthcare and Industrial markets. The company has a truly global footprint with manufacturing sites right around the world, with the vast majority of sales coming from within Europe, North America and Asia.

Geographic ‘insulation’

This wide geographic spread has somewhat insulated the company from many of the uncertainties that have made the current environment very challenging for many of its peers, particularly the effects of recent currency fluctuations and the as-yet-unknown longer-term impact of Brexit.

From a valuation standpoint, the current share price translates into an expensive-looking price-to-earnings (P/E) multiple of 27 for the current fiscal year to March. But with City analysts forecasting more double-digit rates of growth in the coming years I think the shares are well worth that premium price tag.

Electronic warfare

If Scapa’s pricey-looking valuation is still a little too rich for your taste, then fellow AIM constituent Cohort (LSE: CHRT) might be better suited to your palate. The Reading-based technology group also saw its shares take a little breather in 2017 after an impressive run that led to a sixfold increase in its market capitalisation in as many years.

The group currently operates four innovative, agile and responsive businesses based in the UK and Portugal, which provide a wide range of services and products for domestic and export customers in the defence and security markets. Particular areas of focus include electronic warfare, cyber security, surveillance technology, and advanced communications systems.

The group’s shares have fallen back from last year’s all-time highs of 462.5p and now look to be offering greater value at 12 times earnings for the current year to April. For this reason Cohort is currently my top pick from the defence and aerospace sector.

The post 2 top stocks I’d buy in February appeared first on The Twelfth Magpie.

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Bilaal Mohamed has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort. 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.

The defence giant advised Wednesday that revenues dipped 10% in the six months to October, to £44.8m, while adjusted operating profit ducked 8% year-on-year to £3.6m. On top of this, it said order intake fell to £39.2m from £40.5m previously, and that its closing order book was down to £132.1m from £136.5m.

However, I see no reason for alarm yet. Chairman Nick Prest said: “In recent years the Group’s results have been heavily weighted towards the second half and we expect this pattern to be repeated this year. The closing order book and recent order wins support this outlook.”

Growth story goes on

Earnings have increased at a compound annual growth rate of 9.3% during the last five years, and the AIM-listed play is expected to keep this run going with rises of 4% and 6% in the years to April 2018 and 2019 respectively. And I believe the potential for M&A  should keep earnings on an upward tilt.

Despite its bright earnings picture, Cohort can still be picked up for a song, the firm trading on an ultra-cheap prospective P/E ratio of 10.9 times.

And against this backcloth, analysts are expecting dividends to keep growing at a terrific rate, with last year’s 7.1p per share payout anticipated to rise to 8.2p this year and to 9p in fiscal 2019. Consequently Cohort rocks up with decent yields of 2.6% and 2.8% for this year and next.

Read all about it

Retail star WH Smith (LSE: SMWH) is another share with a distinguished earnings record and which, thanks to rapid expansion at its Travel division, looks on course to keep on delivering plump profits growth.

Earnings have swelled at a compound annual growth rate of 8.7% during the past five years which, while not spectacular, is still pretty impressive given the hard work the newsagent has had to undertake to turn around its troubled high street arm.

It has doubled-down on cost-cutting here in the face of ongoing sales pressure. So while like-for-like sales across its high street stores dropped 4% in the 12 months to August, the £12m worth of cost savings helped trading profit remain stable year-on-year at £62m.

And with further expense slashing to come, and the business improving space management and product mix in its stores, the outlook here continues to improve.

But as I say, it is the terrific sales potential of WH Smith’s Travel unit which really promises to churn out exceptional profits growth in the years ahead. Total sales here jumped 9% in fiscal 2017. And with the FTSE 250 company continuing to increase its international footprint (it saw an extra 414 units on foreign soil last year), and traveller numbers continuing to steadily rise, I am expecting the top line to keep sprinting higher.

City analysts agree, subsequently predicting an extra 5% earnings rise in fiscal 2018. And like Cohort, with profits expected to keep moving skywards, its progressive dividend policy is anticipated to keep rolling too. Last year’s reward of 48.2p per share is predicted to move to 51.6p in the present period, resulting in a chunky 2.3% yield.

I reckon WH Smith’s exceptional growth prospects make it a terrific pick today and worthy of an elevated forward P/E ratio of 20.1 times.

The post 2 dependable growth stocks I’d buy before Christmas appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort and WH Smith. 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.

With that in mind, FTSE 100-listed Micro Focus (LSE: MCRO) could be worth buying and holding for the long run. Its dividend and share price growth could be relatively high.

Improving performance

In the last five years, global software company Micro Focus has delivered highly consistent earnings expa. In fact, its bottom line growth rate has been 14% per annum during the period, with rises recorded in four of the five years. This shows that the company offers a degree of consistency as well as the potential for high growth.

During the same time, dividends have more than doubled. This shows that the company has had sufficient cash flow available to reinvest for future growth. Last year, shareholder payouts were covered 1.6 times by profit. This shows that they remain affordable even after such a sharp rise in recent years. This suggests that more dividend growth could be ahead, and that the rise in shareholder payouts may continue to outpace earnings increases without hurting the company’s financial standing.

Positive outlook

Following the acquisition of HPE, Micro Focus appears to have improved growth potential. It also has a more diverse and potentially less risky business model. In the current year its bottom line is forecast to rise by 20%, followed by further growth of 13% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4. Given its size, scale and strong position in key markets, this seems to be a very attractive price to pay.

Looking ahead to its dividend, the company is expected to record a rise of 9% next year. Since this is three times higher than the current rate of inflation, it suggests that even with a dividend yield of 2.6% today, the company could become a sound income stock over the long run.

Further growth

Also offering high dividend growth potential is independent technology group Cohort (LSE: CHRT). It reported an acquisition as well as a trading update on Monday. It has acquired a further 23.09% of EID for just under €4m. This brings its total holding to 80%, with the Portuguese government holding the remaining 20% of the supplier of advanced electronics, communications and command and control products.

Cohort is on track to meet expectations for the full year. The company is forecast to deliver a rise in earnings of 4% this year, followed by further growth of 6% next year. This puts it on a PEG ratio of 1.7, which suggests it offers good value for money. And with dividends due to rise by 10% this year and yet still set to be covered over three times by profit, the company’s forward dividend yield of 2.9% could become very attractive in the long run.

The post 1 FTSE 100 dividend-growth share I’d buy and hold forever appeared first on The Twelfth Magpie.

More reading

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Peter Stephens owns shares in Micro Focus. The Motley Fool UK has recommended Cohort and Micro Focus. 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.

Cohort’s adjusted pre-tax profit rose by 21% to £14.5m last year, but the group’s statutory pre-tax profit fell by 81% to £1m. These figures translate into adjusted earnings per share of 27.9p and statutory earnings per share of 9.1p.

If you’re a shareholder in the group, you may wonder which of these figures you should rely on. Having looked at the figures, I’m inclined to accept the adjustments, most of which relate to acquisitions and genuine one-off costs. On that basis, today’s figures give Cohort a P/E of 15. The dividend has been increased by 18% to 7.1p, giving a trailing yield of 1.7%.

One of the reasons I’m prepared to accept the firm’s adjusted earnings is that management has a fairly good record of making successful acquisitions. Since 2011, sales have risen by 72%, while earnings per share have risen by an average of about 20% each year. During this time, the group hasn’t issued many new shares and has maintained a net cash balance.

Although revenue was flat at £112m last year, the firm’s order book grew by 18% to £136.5m. Sales and profit growth can often be uneven at this type of business, as the timing of contract wins isn’t always predictable.

Analysts remain bullish on this stock and expect the group’s adjusted earnings to rise by at least 10% this year, putting the shares on a forecast P/E of about 14. I’m encouraged by the strong order book and believe Cohort’s long-term growth potential is attractive.

Pumping out cash

Software group Netcall (LSE: NET) makes customer relationship and workforce management systems. This £94m business is increasingly focused on selling subscription services which provide a high level of recurring revenue.

During the first half of this year, the order book rose by 14% to £16.6m, while annualised recurring revenue rose by 8% to £11.3m. That represents about 65% of the group’s forecast revenue for the current year.

Pre-tax profit rose by 17% to £0.92m during the first half, lifting earnings per share by 7% to 0.6p. However, the biggest attraction for me is the group’s apparent ability to generate cash.

Netcall’s free cash flow was £1.7m during the first half of this year, more than 25% higher than during the same period last year. This strong performance meant that despite an increase in development expenditure, net cash rose by £0.5m to £14.6m.

The company’s strong first-half performance is expected to continue. Broker forecasts indicate that earnings per share should increase by 63% to 2.15p for the year ending 30 June. A bumper dividend of 3.8p per share is expected, giving a yield of 5.6%. Although this level of payout may not be sustainable, I think it’s good discipline for management to return surplus cash to shareholders in this way.

Netcall seems a solid business to me. The only catch is that the firm’s shares are already priced for success, with a 2018 forecast P/E of 28. In my view, shareholders should definitely continue to hold, as more growth may be in the pipeline. But new investors may want to wait for a dip before buying.

The post This fast-growing dividend stock could help you retire as a millionaire appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Cohort. 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.

Specifically, TP reported that based on current trading it expects full-year earnings before interest tax depreciation and amortisation to “significantly exceed current market expectations” and 2017 EBITDA is now expected to be “materially ahead of current market expectations”. Generally speaking, if management uses terminology such as “materially” and “significantly” the figures are more than 20% above (or below) current expectations. 

As well as TP’s better-than-expected trading, management also expects the group’s year-end cash position to now exceed expectations. 

For the full-year, City analysts were expecting the company to report a pre-tax loss of £0.5m but it now looks as if the group might on track to report its first pre-tax profit in nearly a decade. For 2017 analysts had pencilled-in a pre-tax profit of £0.7m on revenues of £25m. 

A record year

Today’s trading update from TP rounds off what has been a great year for the company. The company, which manufactures carbon dioxide removal equipment for submarines, heat exchangers and fabrication components, has won a number of significant contracts with large customers this year, including the Ministry of Defence, BAE Systems and most recently GE Oil & Gas. It’s these contracts that have helped power revenue and earnings above expectations for the year.  

Nonetheless, TP is still trying to recover from past mistakes. The shares remain 93% below their 2008 high of 86p and for the past seven years, the company has struggled to make a profit. 

In comparison, TP’s larger peer Cohort (LSE: CHRT) has nearly doubled revenue and grown pre-tax profits by 240% since 2012. 

Restructuring 

TP’s problems have stemmed from its exposure to the energy industry, which management has been working to diversify away from in recent years. The diversification plan seems to be working but as a defence/technology play, Cohort still looks to be the better option. 

Indeed, while Cohort generates tens of millions in revenue from defence contracts every year, the company also works with bodies such as Transport for London. The group recently signed a deal with TfL for £7m to help develop digital traffic management systems. Cohort’s earnings per share have grown by an average of 25% per year since 2012 and while City analysts have pencilled-in a modest earnings decline this year, next year growth is expected to resume. 

For 2017 the City is expecting Cohort to report earnings per share growth of 15%. 

A look at valuation 

When it comes to valuation, Cohort also looks to be a much more attractive buy than TP. At present shares in Cohort are trading at a forward P/E of 16.3 and support a dividend yield of 1.7%. 

Shares in TP trade at a forward P/E of over 100, but this is based on current forecasts. When the City has had time to digest today’s trading update from the company, its valuation may drop significantly as earnings projections are revised higher. 

The post Why TP Group plc shares soared by a quarter today appeared first on The Twelfth Magpie.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Cohort. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.