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Four years ago, shares in Renishaw (LSE:RSW) were trading at £64.75. Today, the FTSE 250 stock has a price of £22.20.
That makes it look as though a lot has gone wrong with the business. But I think the reality is quite different and things aren’t nearly as bad as they look.
Why is the stock down?
Renishaw is one of the leading manufacturers of precision measuring equipment. Its products are used in production facilities for things like medical devices, robotics, and semiconductors.
It’s the last of these that has been a big drag on the business recently. Semiconductors are a notoriously volatile industry and after a boom in 2021, investment in factories has slowed.
On top of this, the company isn’t easily able to give guidance as to when this will turn around. Its order book only provides it with visibility of around two months ahead on average.
That makes it much more difficult to forecast earnings. And this in turn means the share price can be much more volatile.
Long-term growth
From a long-term perspective, though, there’s a lot to like about Renishaw. It has a strong position in a growing industry – and this can often be a powerful combination for investors.
Semiconductors, robotics, and medical devices look like industries set for long-term growth. And the FTSE 250 company’s products are difficult to compete with in these environments.
Renishaw’s own equipment is highly technical, which creates a barrier to entry for competitors. But its products also feature as parts of machines made by other companies.
In these cases, its components are often specified by the equipment manufacturer. And that makes them almost impossible to compete with.
Valuation
I think the end markets Renishaw sells into will grow over time, even if it’s not clear exactly when and at what rate. But the current share price arguably doens’t reflect this.
The stock trades at a price-to-earnings (P/E) ratio of around 17, but this is based on earnings that have fallen significantly. A recovery could cause this multiple to contract sharply.
With this type of business, I think the price-to-book (P/B) ratio is a good one to consider. The firm’s book value (the value of its assets minus its liabilities) is more stable and less cyclical.
On this basis, Renishaw shares are historically cheap right now. So, for investors who are prepared to live with the uncertainty, I think this is a good stock to consider buying.
Volatility
The danger with Renishaw is obvious – it sells into markets that are cyclical and that means demand is out of its control. And a potential recession could cause profits to decline further.
Investors interested in buying the stock need to judge for themselves whether or not this is a risk they’re comfortable with. For some, it might – entirely reasonably – not be.
For those that can live with the volatility, though, I think this looks like an interesting stock. At historically low multiples, there’s arguably never been a better time to consider taking a look.
