On the day IMI joins the FTSE 100, is it the best engineering growth stock in the index?

A growth stock is generally considered to be one that grows significantly faster than the wider stock market.

IMI (LSE:IMI) joins the FTSE 100 on 19 June. Its share price has increased by 39% over the past five years, compared to a fall of 9% in the FTSE 250, from where it’s been promoted. On this basis, I think it meets the definition of a growth stock.

A brief overview

IMI is a specialist engineering company. It designs and manufactures fluid and motion control systems.

Revenue has grown steadily since 2018 (by 7.5%). But earnings have improved by a more impressive 33%.

However, the problem with engineering companies is that they can be — dare I say it — a little dull and uninteresting. Investors are more attracted to tech stocks.

And I understand why. It’s easier to relate to a battery-powered car than something that controls the flow of fluids. This generally means engineers’ share prices underperform those in more ‘exciting’ sectors.

Share prices and earnings

This year, IMI is expected to generate earnings per share of 112p-117p.

This implies a price-to-earnings (P/E) ratio of around 14. This ratio is often used to assess which stocks offer the best value for money and, in theory, are likely to increase the most.

How does IMI measure up to other FTSE 100 engineering companies?

Of the five, its shares appears to be the cheapest. This might reflect that, until today, it’s been outside the Footsie where companies tend to attract higher valuations. It’ll be interesting to see whether it can close the gap with its peers over the coming months.

At the moment, I think it’s the engineering stock with the most growth potential.

Of course, a P/E ratio shouldn’t be the only factor that’s taken into account when choosing a stock. But by comparing it to others in the same industry, it’s possible to identify potential opportunities for capital growth.

Shareholder returns

I also like stocks that pay generous dividends. Here, IMI doesn’t fare too well.

Like the other four, it currently yields well below the index average. However, its dividend history has been erratic, so it’s hard to forecast accurately what the return to shareholders might be in 2023.

What do I think?

Although I’ve concerns about the lack of growth in its revenue, this is tempered by the rapid improvement in its bottom line.

But it’ll need to start declaring more consistent dividends if it’s to be more widely recognised as a growth stock.

However, I think its promotion to the most prestigious index on the UK stock market means it’ll start to get more attention. And this might increase the pool of buyers for its shares.

Unfortunately, I don’t have any spare cash available to invest at the moment. I’m therefore not in a position to buy IMI shares. Otherwise I’d be happy — possibly excited — to include this engineering growth stock in my portfolio.

This post was originally published on Motley Fool