THE tech company Oxford Instruments makes things most of us will never encounter, at least knowingly: tiny, ultra-powerful cameras used in space exploration and superconducting wire that helps MRI scanners peer into the human body.
To keep its customers buying, the first Oxford University spin-off — set up in 1959 — needs to stay close to the bleeding edge of technology. Even doing that offers no assurance of success. The shares have dived 60% since last year after two profit warnings. The first was the result of sanctions on Russia. The walling off of that small but important market helped push the company to a £9.7m pre-tax loss for the 12 months to March 31, compared with a £24m profit the year before.
When chairman Nigel Keen gave the second warning last month, he blamed it on China, among other things, where Oxford’s hottest sellers include hand-held X-ray fluorescence guns used in metal recycling. On Friday the shares closed at 663p, valuing the company at £374m. The problem for Oxford is it is heavily dependent on acquisitions — it regularly snaps up small developers of the latest nano-tool. That will be harder to do when there is less cash to splash.
Some investors will spot that Oxford is trading at a discount to rivals on a price-to-earnings basis, and scent an opportunity.
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They’re looking at the wrong numbers, says the broker Jefferies, which reiterated its 535p price target last week. Its concern is the balance sheet. The business is being buffeted from all sides: weak Japanese demand, a drop-off in sales of its industrial products, and lower prices for superconductor parts.
It laid off 7% of the staff last year and recently convinced its banks to relax the terms of its main credit facility. Jefferies warned, however, that there was no turnaround apparent and Oxford’s leverage ratios could get close to the higher level its banks have allowed.
And what if things get worse in, say, China, Oxford’s biggest market after America? This is perhaps more finely balanced than it appears. Sell.