Why Intertek is a good barometer for the effects of the Coronavirus

“Globalisation and the steady growth of trade flows around the world have been a boon to testing and certification specialist Intertek and the FTSE 100 firm’s latest increase in annual sales, profits and especially its dividend are testimony to the quality of its business model,” says Russ Mould, AJ Bell Investment Director.

“Intertek has increased its dividend payment every year since it listed in London in 2002 as it has provided tests for consumer products in over 1,000 laboratories in over 100 countries for Governments and customs officials to check compliance with quality and safety standards.

Source: Company accounts

“The firm’s business also means it offers insight into global trade flows and how they are being affected by events such as the Coronavirus outbreak. CEO André Lacroix is candid enough to admit in his outlook statement that Intertek is not immune from disruption to supply chains in China and any slowdown in global trade flows, adding it is not yet possible to quantify the impact on the company.

“Intertek does flag there have been shutdowns in its operations in mainland China and Hong Kong, as well as Taiwan, although all facilities have resumed normal operations, even if travel restrictions are in place.

“As you would expect given its impressive dividend growth record, Intertek has a great track record of increasing its profits too. What turned out to be a mid-cycle slowdown and weakness in commodity prices took their toll in 2014, when earnings dipped, and this reinforces Mr Lacroix’s point about how Intertek may not be immune from any economic fall-out that results from the viral outbreak.

Source: Company accounts, Sharecast, analysts' consensus forecasts

“The stock market is alive to this, as you would expect. Using the monthly data provided by the CPB’s World Trade Monitor, it is possible to see how Intertek’s shares sagged during the recession and Great Financial Crisis of 2007-09 and again during the mid-cycle lull of 2014-15.

Source: www.cpb.nl, Refinitiv data

“This can be seen even more clearly if you look at year-on-year growth rates in global trade flows. If anything Intertek’s shares had been weathering a global slowdown in trade pretty well but the viral outbreak has raised concerns of a sustained drop in commercial activity.

“That in turn has left Intertek’s valuation looking a little exposed. A forward price/earnings of 25 times means Intertek trades on broadly twice the FTSE 100’s forward earnings multiple even though trend earnings growth is not expected to be much higher and a forecast dividend yield of 2.0% is much lower than the index overall.

Source: www.cpb.nl, Refinitiv data

“This means there is a danger that investors are mistaking quality for safety at Intertek, as its earnings are susceptible to some degree to any global slowdown due to the virus (even if profits are likely to fall a lot less of those at airlines, for example, should a recession hit).

“The lofty valuation does mean that Intertek’s shares could come under further pressure if 2020 profits do look set to miss analysts’ forecasts, although the firm is likely to also see any upturn in activity pretty quickly too. As such, whether investors own the shares or not, they could be an interesting indicator for both global economic activity and also wider stock market sentiment in the weeks and months ahead.”

These articles are for information purposes only and are not a personal recommendation or advice.