To me, conditions in the London stock market look promising. And it’s a great time to hunt for shares that have the potential to double my money within a reasonable timescale. In fact, I’ve found a UK stock that may be able to do it.
The company is Alumasc (LSE: ALU). It supplies a range of products relating to buildings, for water management, roofing and other fittings.
In October, it delivered a robust trading update. Volumes and margins had been “strong” and ahead of the equivalent period a year earlier. Transportation and material costs had been “stabilising”. But energy costs and currency exchange rates remained volatile. However, the directors expect the business to benefit from a “strong platform for long-term growth”.
Vulnerable to economic downturns
I’d categorise the business as being vulnerable to the effects of general economic downturns. But the directors seem confident Alumasc has strong brands and solid positions in each of its market niches. And they expect the business to fare well in the years ahead.
Meanwhile, City analysts predict earnings will likely increase by around 4% in the trading year to June 2024. And in the current economic environment, I see that small increase in earnings as positive.
But the valuation looks stingy. With the share price near 155p, the forward-looking earnings multiple is near just six for the trading year to June 2024.
And one reason for the low rating could be because of the multi-year record of volatile earnings. Indeed, from one year to the next, earnings have been as likely to plunge as they have to soar higher. For example, they rose by a triple-digit percentage in the 2021/22 trading year because of a back-log of orders caused by the pandemic. And the share price shot higher by almost 300% after the Covid collapse of 2020.
Encouraging contract wins
But over the past year, the stock has declined by just over 30%. And there’s a lot of potential value on offer at the current valuation. Indeed, the firm’s history of big swings in earnings and the share price is part of the reason I see potential for the stock to double.
Right now, the valuation is low and trading is good. Yet I’m also encouraged by recent contract wins to supply Gatic access and drainage products “across a number of projects for airports and seaports in Hong Kong, India, the Philippines and Singapore”.
Chief executive Paul Hooper said these wins demonstrate the global reputation of the Gatic products. And they underline the “significant” ongoing opportunity to supply large international infrastructure projects.
If further wins drive up future earnings, it’s possible investors may bid up the valuation. And a reassessment by the market could work alongside growing earnings to double the share price from where it is now. After all, a re-rating to 12 times earnings would not seem excessive to me.
However, positive outcomes are not guaranteed. The business may yet run into further operational difficulties and it’s even possible for me to lose money on the shares.
Nevertheless, if I had spare cash to invest now, I’d dig deeper into this opportunity with a view to buying the stock to hold as operational progress unfolds in the months ahead.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2023