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Morgan Advanced Materials (LSE:MGAM) is a FTSE 250 industrial company, focusing on specialist products using carbon, advanced ceramics and composites. This includes thermal products like those used for electric vehicle charging and ceramic cores for aircraft engines. It markets itself as a global leader, and it’s certainly operating in sectors with high demands for precision instruments and products, which creates something of an economic moat.
However, the last few years haven’t been straightforward. In fact, the stock is trading near 10-year lows. Morgan has struggled recently due to weak end-market demand, particularly in semiconductor and industrial sectors, along with adverse sales mix and foreign exchange challenges.
Efficiency is key
Morgan is expanding a restructuring programme that reduces manufacturing sites and improves efficiency. In fact, the number of sites it operates have fallen from 85 in 2016 to around 60 in 2025. These changes are delivering significant annual cost savings and enhanced operating profit benefits.
The company is also investing heavily in capital projects, particularly expanding capacity in high-growth areas like semiconductors, healthcare, and clean transportation, while maintaining flexibility to adjust spending based on market demand.
Additionally, Morgan is focusing on digital infrastructure upgrades and a leaner management structure to support operational agility and customer proximity, positioning itself for long-term growth despite current market uncertainties.
The valuation proposition
Morgan warned in August that full-year adjusted operating profit would likely come in at the bottom of market expectations, citing the challenges mentioned above and continued soft demand.
In the six months to 30 June, adjusted operating profit dropped to £58m from £71.3m a year earlier, while revenue declined 8.7% to £522.6m. Clearly, not good. Trading conditions stayed difficult across its industrial end-markets, with lower orders in Europe and China and slowing growth in the US.
The forward valuation is constantly changing given shifting forecasts and movements in the share price. The shares are now trading with a forward price-to-earnings (P/E) ratio of 16.4 times. Given expected earnings growth in the medium term, this figure should fall to 9.1 times by 2027 — that’s based on earnings forecasts and today’s share price.
Net debt, however, is forecast to remain considerable relative to its equity, peaking at £284m in 2025 before edging lower in subsequent years. For context, its market cap has fallen below £600m, and has come close to the lowest capitalised companies on the FTSE 250 index. Servicing this debt could well be the biggest risk to consider when investing in Morgan.
The bottom line
Ultimately, I’m a big fan of industrial companies that have an economic moat and pricing power. But the problem is the mix. A chunk of revenue still comes from cyclical industrial markets — steel, automotive, energy — where volumes are under pressure and customers push back hard on price rises.
The latest results, however, suggest the transition towards higher-margin and less cyclical industries hasn’t had an impact yet. But it’s early days, and there are plenty of other UK success stories.
Rolls-Royce’s successful efficiency drive and transition saw the stock increase in value by 14 fold. Melrose Industries and Bodycote are also seeing positive share price action as they undergo their own transition programmes.
All considered, I believe it’s worth considering. Debt may hinder some progress, but the company has potential.
This story originally appeared on Motley Fool
