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Is a sharp 13% crash in this FTSE 100 stock a buying opportunity for me?

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·3-min read
One English pound placed on a graph to represent an economic down turn
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The past few weeks have been a good one for the FTSE 100 index as it made steady gains. But not all its constituents have rallied. One stock in particular caught my attention yesterday after it dropped over 6%.

But that is just one in a series of drops that meteorology and healthcare stock Renishaw (LSE: RSW) has seen in the past two weeks. Since the last week of April, in total it has seen a 13% drop, however, in a year it’s risen from 3,776p to 5,645p as I write.

Why is the Renishaw share price crashing?

This drop follows complications regarding the company’s potential sell-off. It had put itself up for sale and mid-April was the deadline for potential buyers to express their interest. However, the response to the otherwise financially healthy company has been lukewarm.

According to a Bloomberg report, the company’s high valuations are responsible for this. According to the Financial Times the company’s 12-months trailing price-to-earnings (P/E) ratio is at a high 97 times. Its forward earnings ratio is also slated at 51 times.

To me, this suggests that Renishaw’s sale may or may not go through. If it does not, would I consider buying the share or not based on its merits?

How has it performed?

In terms of financials, it is in a strong place. In its trading statement for the nine months ending March 31, the company reported 4% increase in revenue. Much of Renishaw’s revenues are derived from meteorology, which provides products like probe systems and performance testing products, among others.

Its healthcare segment is growing fast too, with an 18% increase from last year. The segment includes dental products and precision engineering solutions for treatment of central nervous system diseases.

Renishaw’s profits also came in very strong, with an increase in statutory pre-tax profits of 440% to £106mn for the year to date.

The combination of investors’ heightened interest in relatively safe stocks over much of the past year, and its own performance reflects in its share price too. Even after the latest decline, it is presently trading near all-time highs. On the other hand, the share price has still more than doubled since the plunge seen during last year’s stock market crash.

I like Renishaw stock, going by the fact that it is a highly specialised company and is performing well.

What can happen next

At the same time, for me buying shares in a company that is up for sale is a gamble. This is especially so for Renishaw at present, where valuations are a concern. If I buy the stock at today’s price, and it decides to sell itself at a lower valuation, that leaves me with a loss.

On the other hand, if the sale does not go through, and its share price keeps rising, I miss out on a great buying opportunity.

What I’d do about the FTSE 100 stock now

Right now, I think that the risk in buying it is higher than the potential return, especially at its elevated share price. So I will now watch this FTSE 100 stock for developments and buy it only if they look favourable.

The post Is a sharp 13% crash in this FTSE 100 stock a buying opportunity for me? appeared first on The Motley Fool UK.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Renishaw. 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 2021

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