Today is a good day for the share price of Morgan Advanced Materials (LSE:MGAM). The stock has jumped almost 8% since this morning on the back of its latest trading update. Today’s surge is pushing the business even higher, and its 12-month performance now stands at an impressive 46% return. So what’s got investors excited? And should I be considering this business for my portfolio?
Share price boosted by progress
As a reminder, Morgan Advanced Materials is a specialist in thermal and electrical material production. Its portfolio of products ranges from high-performance crucibles for metal foundries to electrical carbon brushes for power generators. The company was founded 165 years ago. Since then, it has established itself as a leader in a fairly cyclical industry.
This morning, management provided a short (and sweet) update about what’s going on. And given the upward direction of Morgan Advanced Materials’ share price, I think it’s fair to say, investors are pleased. Revenue over the last nine months came in 8.9% higher compared to a year ago. Impressively, this growth originated entirely from organic sources and was predominantly driven by its thermal and electrical products line.
Consequently, the company has reiterated its previous guidance estimating that full-year revenue growth will lie towards the higher end of a 7%-9% range. Meanwhile, its operating margins are also expected to improve thanks to the restructuring programme that commenced last year. Needless to say, this is excellent news. So, seeing the stock jump by nearly double-digits on this update is hardly surprising to me.
The risks that lie ahead
As encouraging as this latest report is, the issued guidance is far from guaranteed. Nor is the firm free from risk. While overall sales are rising, the group’s Seals & Bearings line of products hasn’t been a stellar performer. In fact, revenue from this segment is actually down, though management hasn’t been too generous with the details regarding the magnitude of this decline.
Looking at the interim report published at the end of July, it seems this division has seen sales fall by around 17%. Given that Seals & Bearings represented around 16% of the revenue stream last year, full-year performance may fall short of guidance if sales continue to decline. In such a scenario, the Morgan Advanced Materials share price could suffer some short-term volatility.
Time to buy?
This company certainly looks like a unique business. And its high degree of engineering specialism does make the list of competitors relatively short. In my experience, those are some good traits to have. But would I buy the stock today? Personally, I’m not interested. I can’t deny it looks like a good business, especially with margins forecast to rise in the near future. However, I think there are far better growth opportunities to be had elsewhere, so I’m keeping this stock on my watchlist for now.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Morgan Advanced Materials. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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