Interactive Investor

Business booming for these FTSE 250 stocks

25th January 2023 15:54

Graeme Evans from interactive investor

Despite talk of a recession and profit downgrades, there was plenty of reason to be cheerful on the mid-cap index.

Mid-cap investors had more cause for optimism today as earnings upgrades by discoverIE Group (LSE:DSCV) and Hill & Smith (LSE:HILS) lent weight to the recent improved stock market mood.

The highly regarded FTSE 250 pair are the latest companies to show that trading at the end of 2022 turned out to be more resilient than many gloom-laden forecasts in the autumn, aided by a recent fall back in commodity prices and signs of robust demand.

This was also highlighted today by events and data group Ascential (LSE:ASCL), which reported double-digit revenues growth across all four of its trading segments, and by easyJet (LSE:EZJ) after it revealed a big improvement in winter trading.

Other recent upgraders have included North American-focused corporate merchandise firm 4imprint Group (LSE:FOUR), while yesterday AIM-listed business utility services provider Yu Group (LSE:YU.) upgraded its guidance on 2022 profits for the fifth time.

The better-than-expected third quarter performance by discoverIE, which makes customised electronics for industrial use, featured a quarter-on-quarter trading improvement as sales rose 11% on a year earlier to a new record.

Just under half the growth rate was achieved organically, with the rest coming from acquisitions and from foreign exchange movements. The company said a strong order book provided good visibility of demand and that semiconductor sourcing issues flagged last year at two of its 21 businesses are continuing to improve.

It said it is on track to deliver full-year underlying earnings ahead of its expectations, adding that its focus on quality high-growth markets left it well positioned for further progress.

Peel Hunt said an organic growth rate of 5% was an impressive result against tough comparisons the previous year.

The broker added: “The order book is starting to normalise, which is likely a reflection of supply constraints easing, though remains at a high level and ahead of last year. The outlook is difficult to read, but by no means downbeat, and we reiterate our “buy” rating and 1,000p target price.”

The shares today rose 29p to 821p, having recently derated on the back of macro worries over inflation and supply chain issues. However, analysts at finnCap believe the company has the potential to revisit the high of 1,200p seen in October 2021.

They said today: “We reiterate our view that discoverIE’s proven growth strategy, focused on long-term, structurally growing markets across Europe, North America and Asia, and a diversified customer base, continues to deliver despite the difficult macro background, and this performance will progressively drive the shares to new highs.”

Meanwhile, road safety barriers and structural steel services firm Hill & Smith said strong trading in the last two months of 2022 meant it expected full year operating profit ahead of current City forecasts at more than £93.3 million.

Today’s release is short on detail but highlights outperformance within its US-based operations in galvanising and engineered solutions.

Analysts at Jefferies said: “This is important, in our view, given the development of the US business over the next five years is so central to the investment case.

“Encouragingly, it also suggests that volatile raw material (ie zinc) and energy costs have been well managed, and that pricing increases have stuck (which is no mean feat).”

Hill & Smith’s shares have recovered from a low of 859p in October to reach 1,280p, but Jefferies sees further upside to 1,400p for return to a level last seen in May.

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