With a 23% annual return, could this growth stock be too good to ignore?

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. 

The post With a 23% annual return, could this growth stock be too good to ignore? appeared first on The Motley Fool UK.

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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has recommended Goodwin Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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