Is IMI a Buy?

LONDON -- Diversified engineer IMI (LSE: IMI  ) has displayed enviable resilience in the face of enduring weakness within its key markets of the U.S. and Europe. It reported in November's interims that total group revenue during the first 10 months of last year was up 6% from the corresponding 2011 period.

Bubbly risk appetite has helped push IMI's share price to record highs of late: It struck a summit of 1,199 pence toward the start of the month.

Quality rising to the top
IMI is a reputable builder of niche products for specialist markets, with 70% of all revenue emanating from such activities. Indeed, broker Numis points out that the firm has a solid footing in areas with excellent long-term growth prospects, including energy reduction, climate change, and urbanization.

IMI has also taken steps to build its after-market revenue, which accounts for more than a third of sales. Away from the top line, the company is realizing its ambitious plans to improve margins and is significantly bolstering its low-cost manufacturing activities across the group. Further acquisition activity could also supplement organic growth: IMI spent about 100 million pounds on merger and acquisition activity last year alone.

Earnings primed to steam higher
City analysts expect earnings per share to accelerate in the medium term from a forecast 1% advance to 82 pence for calendar year 2012. EPS is anticipated to rise 5% in 2013 to 86 pence before leaping 10% in 2014 to 95 pence. Results for last year are due on March 7.

The shares carry a premium, however. A P/E of 14.3 is estimated for last year, even though this rating is forecast to fall to 13.6 and 12.4, respectively, in 2013 and 2014. But IMI's solid reputation in red-hot growth markets, combined with the safety associated with a diverse customer base, makes it a standout pick in the manufacturing sector and therefore worth the extra cost, in my opinion.

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IMI also comes with a meaty dividend yield, albeit below the FTSE 100 average of 3.5%. City estimates of a 2.8% payout for 2012 are expected to increase to 3% and 3.3%, respectively, over the next two years.

The firm's ultimately cyclical nature can theoretically put potential payouts at risk in times of macroeconomic uncertainty. But the dividend could be covered 2.5 times for 2012 and is expected to remain at a healthy 2.4 and 2.5, respectively, for 2014 and 2015. A reading above two is generally considered well-protected.

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