The Austal Limited (ASX: ASB) share price is up 8.91% at the time of writing after updating its full year guidance today. The company reported that full year revenue would likely increase by $100 million to $2 billion. Accordingly, earnings before interest and taxes would increase by $15 million.
This, along with many other positive announcements, sets the company up for an explosive growth spurt.
An undervalued gem
The Austal share price plummeted earlier in the month after news that it had lost a major contract to a lower priced competitor. But I think the market has oversold this company significantly, creating a fantastic buying opportunity.
In fact, on the same day that Austal announced its lost contract, it also announced an additional $324 million contract for the Royal Australian Navy.
Its location is also noteworthy. Recently, I visited the US town where Austal’s US production facilities are located – Mobile, Alabama. It is hard to overstate the impact of the company there. The town of Mobile runs on the Austal operations. Aside from strategic and tactical military goals, US defence spending is designed to create jobs. In my opinion, there is no way Austal could have won any US defence work from an Australian manufacturing location – it just wouldn’t happen.
Why Austal shares are ready for explosive growth
Austal revealed an order book worth $4.3 billion in its FY20 H1 report. It has also announced considerable contract wins since that time. Over the past 5 years, the Austal share price has grown by about 12% per year on average. Its current price-to-earnings ratio is 14.9 (at the time of writing), and over the past 9 years its average P/E has been closer to 17.
This company is right in my sweet spot as an investor in manufacturing companies. It has already spent the money to build the infrastructure, has impressive relationships, and is built on a track record of honesty and quality products. I think Austal shares are likely to see explosive growth over the next 1–2 months.
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Daryl Mather owns shares of Austal Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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