Renishaw (RSW) ... Reni – not so – sure

I have no doubt that Renishaw (mkt cap £1.3bn) is a very good company. But ... in the context of its limited visibility of sales, the anaemic macro backdrop, and what others in the electric component space are saying, its valuation appears bonkers.

Renishaw suggests that its “order book remains at approximately one month’s revenue.” The havoc with which this can impact on forecasts is demonstrated in figure 1, whereby consensus sales forecasts were cut by 17% over a six-month period during 2009. In line with the high operational gearing of the business, the impact of weaker sales on overall 2009 earnings was significant. 2009 earnings fell by 89% YOY.

Bloomberg consensus (figure 2) projects sales to rise by 6.5% in 2013 and a further increase of 7.3% in 2014. I reckon this to be somewhat complacent against the weak macro backdrop. Further, the group’s EBITDA margin is projected to improve to between 32-33% over the next few years. As highlighted above, operational gearing can be high in this business and so any deviation from forecast sales and the impact on profitability could be significant.

The group’s dividend is fairly modest, offering a prospective yield of 2.3%. The shares trade at a multiple of c. 5x book value and a P/E rating of 17.2x 2013 consensus earnings, falling to 16x 2014 consensus earnings. Renishaw is not cheap.

Although Premier Farnell (PFL) and Volex (VLX) both service different customers to each other and to Renishaw, I would imagine that weak underlying demand is relatively pervasive across the electrical component space. As such, I reckon the downgrades to earnings expectations for both PFL and significantly so for VLX over recent months are difficult to ignore. Perhaps more so is the close historic correlation between each company’s share price with Renishaw’s, which has dramatically broken down over recent months.

In light of the above, I can see little reason to justify a significantly higher price for Renishaw, but plenty of scope for a sizeable drop. The risk/reward here appears skewed. I shorted at 1776p/shr. 

The limited forward visibility of sales is demonstrated by the sudden drop in 2009

In the context of the weak macro backdrop, consensus sales forecasts seem complacent

RSW valuation - forward P/E rating and EV/EBITDA multiple

Volex (VLX) earnings momentum - what others in the electric component space are saying is hard to ignore

RSW and VLX share prices - the disconnect is also difficult to ignore

RSW and PFL share prices - another disconnect in the electric component space

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