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Oriental Technologies Investment Limited (ASX:OTI) And The Capital Goods Industry Prospect For 2017

Jonathon Baker

Oriental Technologies Investment Limited (ASX:OTI), a AUDA$1.77M small-cap, operates in the electrical equipment industry, which often track the broad economic cycle. During growth, businesses have excess cash, and are comfortable buying ancillary equipement. However, when economic conditions are challenging, businesses may try to repair equipment instead. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 16.48% in the upcoming year , and an optimistic near-term growth of 20.27% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether OTI is lagging or leading in the industry. See our latest analysis for OTI

What’s the catalyst for OTI’s sector growth?

ASX:OTI Past Future Earnings Nov 1st 17
ASX:OTI Past Future Earnings Nov 1st 17

The electrical equipment industry is relatively fragmented, with an exception of few dominant players with a large portion of sales. Operating structures involve high fixed costs, as well as fluctuating cost of raw materials used in manufacture of products, which impacts the companies’ earnings performance. Over the past year, the industry saw negative growth of -45.82%, underperforming the Australian market growth of -4.59%. OTI lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its electrical equipment peers. As the company trails the rest of the industry in terms of growth, OTI may also be a cheaper stock relative to its peers.

Is OTI and the sector relatively cheap?

ASX:OTI PE PEG Gauge Nov 1st 17
ASX:OTI PE PEG Gauge Nov 1st 17

The electrical equipment products sector’s PE is currently hovering around 24x, higher than the rest of the Australian stock market PE of 16x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry returned a similar 10.14% on equities compared to the market’s 11.92%. Since OTI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge OTI’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? OTI has been a electrical equipment industry laggard in the past year. If your initial investment thesis is around the growth prospects of OTI, there are other electrical equipment companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how OTI fits into your wider portfolio and the opportunity cost of holding onto the stock.

Are you a potential investor? If OTI has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its electrical equipment peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at OTI’s future cash flows in order to assess whether the stock is trading at a reasonable price.

For a deeper dive into Oriental Technologies Investment’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other capital goods stocks instead? Use our free playform to see my list of over 100 other electrical equipment companies trading on the market.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.