Why outlook for Spirent Communications appears pretty positive

Network security and solutions’ provider Spirent Communications (LON:SPT) has largely had a good run at the equity markets in the past 12 months, with the trend line pointing firmly upwards. It received no small help from the latest trading update released on 1 May.

Healthy financials

In the update, for the period of January 1 to March 31, the company reported a number of positives. First off, it spoke of the “positive momentum” for the quarter, with a growth in both revenue and earnings. Secondly, it mentioned robustness in the order pipeline, which augurs well for the future.

And thirdly, it talked of an expected uptick in the second half of the year, which further bolsters the outlook. As a result, it “remains confident in delivering further strategic progress in the year”.  This follows the full year results for 2018, which showed 5% increase in revenue and 31% increase in pre-tax profits.

Robust growth in largest segment

The company is primarily focused on its Networks & Security business, which accounts for 60% of the revenues. This segment provides testing products and services that enable faster development of new devices, networks and applications. It is worth noting that the segment showed faster revenue growth of 9% than the business as a whole in 2018 and has shown strong operating profits too.

However, the second biggest revenue source – the Lifecycle Service Assurance business – saw only 3% increase in revenues during the year, though a still healthy operating profit. The remaining business is garnered from the Connected Devices segment, which provides tests for the development of new devices. The segment showed flat-lining in revenue, but decent increase in operating profit.

Outlook good

Going forward, the company appears quite positive about its prospects. In fact, it mentioned that 5G technology offers opportunity to the business, for which it is well poised to support its customers, at the time of the release of its annual results earlier this year. The share price increase already gives much confidence to the investor.

Peer comparison

The only red flag is that high price to earnings ratio compared to its peerset, which stands at 22.3x on a twelve months trailing basis. Even though they are not exact comparables, companies like Spectris and Electrocomponents, have more favourable ratios. That said, Spirent Communications is not the most pricey one either. Companies like Oxford Instruments and TT Electronics have a higher ratio.

Conclusion

In other words, the company is somewhere in the mid-range for P/E. But in so far as the share price has a tendency to gyrate, and is presently sitting on what looks like an ascent in terms of pure data trends, it might be good for investors to wait for some time and buy the share when it is better priced.