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Shares in FTSE 250-listed engineering firm IMI (LON: IMI) have surged 8% higher in the past month following the release of its upbeat third quarter trading update.

The company, which makes valves and smart devices that control the flow of liquids, reported stronger than expected trading for the period, with year-on-year revenue rising 6% to £453m.

Encouragingly, sales were 5% up versus the same period of the 2019 financial year. As a result, IMI raised financial guidance for the full year. It now expects adjusted earnings per share to be between 88p and 92p versus a previous forecast of 85p to 90p.

What exactly is driving the share price at IMI?

The firm’s improved performance was driven by two of its three main segments. IMI’s Hydronic Engineering division, which supplies products for heating, ventilation and air conditioning (HVAC) systems, reported a 10% rise in revenue versus the third quarter of 2019. Similarly, IMI’s Precision Engineering segment, which focuses on motion and fluid control technologies, produced 6% revenue growth compared to 2019.

However, the company’s Critical Engineering division, which produces specialised valves and actuators to control the flow of steam, gas and liquids, posted zero revenue growth versus its 2019 level. Moreover, its order intake was 15% lower than in the same quarter of 2019. Around 20% to 30% of the segment had previously been ‘under review’. IMI has now decided to retain and develop this part of the business due to its improving performance over the past 18 months.

However, with 45% of the division’s sales being derived from fossil power and oil & gas businesses, it may continue to act as a drag on the company’s overall performance. Both industries may face long-term structural decline as the world pivots towards a low-carbon economy. This may limit sales and profit growth opportunities for the segment in the coming years.

What is the growth potential for IMI plc?

IMI highlighted in its third quarter update that supply chains and the markets in which it operates remain volatile, while rising input costs persist. However, factors such as an improving outlook for the global economy, which is forecast to grow by 5.9% in 2021 and by a further 4.9% in 2022, could catalyse demand for its products across a wide range of industries. Furthermore, it has thus far been successful in passing higher costs through to end customers to preserve margins.

Meanwhile, the company’s focus on innovation and efficiency could catalyse its financial, and share price, performance over the long run. Indeed, its rationalisation programme delivered £33m in cost savings in 2020. Further progress could support margins, while innovation in areas such as liquid hydrogen processing, where the firm has secured early orders, could help offset the aforementioned impact of structural decline in other areas.

Are IMI shares still worth getting into?

Clearly, investor sentiment towards IMI has improved significantly following a strong third quarter performance. As such, the stock now trades on a forward price-earnings ratio of around 20 using expected adjusted earnings for the full year. Given that it is forecast to post a 19% annualised rise in reported earnings over the next two financial years, the company’s shares could offer further capital growth over the medium term.

Of course, their prospects are likely to be reliant on further upbeat performance from the world economy, the company’s capacity to pivot to faster-growing areas and its ability to maintain margins, and supply, in the short run. However, recent performance suggests IMI may be relatively well placed to achieve those aims, albeit with heightened volatility likely to persist.


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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Robert Stephens

Robert Stephens

Robert Stephens is a CFA Charterholder who has around 15 years’ experience working in the financial services industry.

The vast majority of that time has been spent working as an Equity Analyst, with a focus on FTSE 350 shares in the consumer goods, consumer services and retail sectors.

He has also contributed to a wide variety of media publications on a freelance basis, including The Telegraph, What Investment, Master Investor and Citywire.

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