Shares for the future: hidden risks at this stock prey on my mind

Usually, my articles include a table showing the performance of the company I am scoring. This year I cannot do that, because Goodwin (LSE:GDWN) has sold most of the larger of its two long-standing divisions.             

Sale of the century

Because negotiations were at an advanced stage when Goodwin published its annual report, the Mechanical Engineering division was treated as a discontinued operation. The reported results for the continuing operation are not comparable to previous years because it will be so much smaller.

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However, Goodwin benefited from ownership of Mechanical Engineering for the whole of the year to April 2026 (and will for most of 2027). Revenue and profit figures for the discontinued operation show the improvement in 2026 (blue bars in the chart below) was, as had been promised, phenomenal.

Source: Goodwin annual reports

Historically, Mechanical Engineering has contributed most of Goodwin's revenue. Goodwin Steel Castings is the company's oldest business, founded in 1883.

During the past decade, Goodwin pivoted from previously lucrative but weak oil and gas markets to the nuclear and defence industries, principally in the US. This has required it to invest heavily in its foundry, and develop new relationships with demanding customers, which has dragged on profitability.                   

Over the last three years, though, Mechanical Engineering has re-established itself as the indisputable profit centre of the group. It has also been helped by a return to profit of a subsidiary that makes radar systems.

Source: Goodwin annual reports

It seemed like Goodwin had positioned itself to profit for decades from long-term contracts to supply the US and UK naval frigate and submarine programmes and nuclear waste containers in an increasingly hostile and energy hungry world. Instead, it has accepted a £1.1 billion offer for the business from US private equity firm Cerberus.

Why Goodwin has disposed of its biggest and most profitable business is something of a mystery. The company says as part of Cerberus, Mechanical Engineering will benefit from investment and leadership experienced in the defence sector. It wants to focus on the second division, Refractory Engineering and a new division, Technologies.

Mechanical Engineering will contribute revenue for most of financial year 2027. After that Goodwin will return a substantial portion of the £1.1 billion sale proceeds to shareholders and retain some in the remaining business so it can operate on a zero-net debt basis.

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Since Goodwin's market capitalisation is slightly lower than the £1.1 billion headline price for Mechanical Engineering, either traders are discounting risk associated with the deal, or they think the rest of the business is worthless.

There is risk. Completion is some distance away, subject to approval by various authorities, and the £1.1 billion price is at the same time "approximate", "maximum" and "subject to customary closing adjustments".

The remaining business is not worthless. It is small but consists of a profitable and growing core and a promising but loss-making startup.             

Future Goodwin

Goodwin's involvement in Refractory Engineering began in 1965, when it acquired Goodwin Refractory Services (GRS). GRS and its manufacturing and sales offshoots in India, China and Thailand make investment casting (moulding) powders, waxes and rubbers used in lost wax casting. This is a process used to manufacture jewellery and tyres.

Since its main rival Kerr ceased production in 2018, Goodwin has described GRS as the global market leader in investment casting powders.

Due to the high price of gold and silver, GRS reports that jewellery buyers are moving downmarket from precious jewellery to "wear once" items. Goodwin benefits because the same quantity of casting powder is required whether jewellery is cast in brass or gold, and the volumes are much higher. To meet demand, it is planning to open another powder production facility in China.

Refractory Engineering also includes Hoben International and Dupré Minerals. Hoben quarries and processes minerals including cristobalite, the primary raw material of its casting powders, and ground silica, also an ingredient. Dupré processes another mineral, vermiculite, which can withstand very high temperatures. It is used in insulation, brake linings and technical textiles.

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Refractory Engineering has similar favourable characteristics to the Mechanical Engineering division: vertical integration and niche technical expertise. During the Mechanical Engineering division's reconfiguration, Refractory Engineering kept the group's results respectable.

Since 2017, Refractory Engineering has grown revenue at a compound annual growth rate (CAGR) of 8%, and operating profit at 17% CAGR. Profit margin has improved from 15% to 24%. Operating profit in 2026 was nearly £16 million. If you were to apply a multiple of 15 times profit, the business might be worth £240 million.                               

After the sale of Mechanical Engineering, Goodwin says it will put particular emphasis on accelerating the commercialisation of AVD Fire and another business, Duvelco. Duvelco made a £3.5 million loss in 2026.                         

Along with Internet Central, an internet service provider that was last mentioned outside the notes in a Goodwin annual report in 2007, Duvelco forms the new Technologies division. Both businesses are part of Mechanical Engineering. They are now in the process of being carved out.

Duvelco makes Ducoya, a novel polyamide resin, which is a high-performance plastic that can be moulded into parts for planes, cars, and semiconductor manufacturing equipment where properties like heat and chemical resistance are important.

In development since 2020, last year Duvelco was granted a patent on a "process step" and also completed the factory in which Ducoya will be produced.

In that year's annual report, Goodwin stated its belief that Duvelco would be the "largest and most profitable division in years to come." It is, of course, selling its largest and currently most profitable business, so the bar has been lowered.

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This year's annual report revealed teething problems. Duvelco has experienced production problems of a "mechanical, not fundamental" nature. The distribution of samples to potential customers has been delayed and so too has "meaningful revenue".

The company does not believe this is a long-term risk, but it has de-risked another aspect of the project. Duvelco has outsourced the compression moulding of parts to a third party rather than make pre-formed shapes and parts itself as it had initially intended.

Snags, and strategic adjustments, are unsettling, but may be par for the course considering Ducoya is novel and historically Goodwin has sometimes taken longer than it initially anticipates to deliver ambitious promises.

Scoring Goodwin: Hidden risk?      

Goodwin is a complex business, and the sale of Mechanical Engineering simplifies it. That makes the remaining business attractive to me. But the uncertainty of the disposal, the size of the remaining business, and the Goodwin family's 54% shareholding concerns me.   

The family will be major beneficiaries of the sale. If the company seeks to return the cash raised to shareholders by tendering for shares, its grip could tighten. Flush with cash, it would probably have the means to take the company private and most of the votes it would need to do it. Given its firm belief in the prospects of Duvelco and AVD, why wouldn't it?

This is speculation. I do not know the family's intentions. But if delisting is the end-game it would turn a long-term investment into a short-term trade, and that possibility preys on my mind.

30 Shares for the future

Here is the ranked list of Decision Engine shares. I review the scores at least once a year, soon after each company has published its annual report. The price scores are calculated using the share price prior to publication.

Generally, I consider shares that score more than 5 out of 10 to be worthy of long-term investment in sizes determined by the ideal holding size (ihs%).

Cohort (LSE:CHRT) and Jet2  Ordinary Shares (LSE:JET2) have published annual reports and are due to be re-scored. Having agreed to a takeover, Advanced Medical Solutions Group (LSE:AMS) is soon to delist.

Click on a share’s score to see a breakdown (scores may have changed due to movements in share price). Key: qual is the share’s score out of 9 for the three quality factors (capabilities, risks, and strategy), price is the price score from -3 to +1, and ih% is the suggested ideal holding size as a percentage of the total value of a diversified portfolio.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.  

Richard owns Goodwin and many shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares.

For more on the Decision Engine and Share Sleuth, please see Richard’s explainer.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard