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With global markets looking shaky, now’s not the best time to look at growth stocks. But one keeps popping up on my radar, and considering it’s not a speculative tech stock, it might be worth a look.
Goodwin (LSE: GDWN) is a family-run engineering group that’s taken off in the past six months. For a business that started life as an iron foundry in the late 1800s, it’s come a long way. After a volatile foray into oil and gas, it adopted a strategic shift into high-growth defence and nuclear markets.
That seems to have lit a fire under the FTSE 250 stock, with the share price up almost 180% since May.
So what’s driving the growth and, more importantly, is it rational or overblown?
Critical contract wins
Around half of the recent growth came after the group announced a lucrative partnership with American defence contractor Northrop Grumman. This strategic collaboration covers four key defence programmes with an initial $16m order, with further orders expected to reach $200m as US submarine programmes receive funding releases.
The cherry on top is an exclusivity agreement to serve as the sole supplier for a critical component worth up to 30% of the deal.
But it’s not just defence – backing Goodwin’s growth prospects is a broadly diversified business. It also builds the critical fuel storage racks for Sellafield, the UK’s nuclear decommissioning site. It has 100 units in its order book already, with further call-offs expected, providing long-term revenue visibility.
Furthermore, it builds heavy-duty submersible pumps for the global mining industry, which are reportedly on track to deliver a 30% year-on-year increase in orders.
Long story short, this is a business with its fingers in many pies — some very lucrative, in-demand pies.
But is it still good value?
Despite its moderate £1.56bn market-cap, Goodwin stock trades at around £200 per share. That makes it the most expensive stock on both the FTSE 100 and FTSE 250. But these days, most brokers sell fractional shares, so the per-share price is less important than how it compares to earnings.
Naturally, I wasn’t expecting to find a low price-to-earnings (P/E) ratio on a surging growth stock. But last Friday, the stock price took a 10% dive, which has helped reduce its bloated valuation. Still, with a P/E of 58 and a P/E growth (PEG) ratio of 1.5, the market may be expecting too much here.
At the same time, its exceptional cash flow is attractive. Using a discounted cash flow (DCF) model, analysts estimate it’s trading at 27.3% below fair value.
My verdict
As the US government shutdown ends and the Autumn Budget approaches, we’ll soon have more clarity on the state of the global economy.
Until then, I myself am holding off on buying any growth stocks. Troubles in the US could hurt Goodwin’s profits, particularly regarding the new Northrop contract. Having recently launched a new aerospace division and made multiple acquisitions, execution risk is another factor to note.
But with decades of proven growth, a solid business model and strong cash flow, I think it would be an excellent long-term stock to consider. And if the market does wobble, I’ve recently covered several stable defensive stocks to help safeguard a portfolio against volatility.
