Gooch & Housego

Optical components maker Gooch & Housego (G&H) has seen the beginnings of a recovery in current demand, but is more excited about longer term prospects.

Based in Ilminster, Somerset, G&H makes optical components for industrial lasers and for the life sciences, aerospace and defence sectors. Although the year to September proved a tough one for the company’s core business, with consumer end market declines leading to customer destocking, chief executive Gareth Jones responded quickly to the downturn, cutting costs but without compromising the company’s ability to respond to a recovery.

Profits slipped 43% to £3.1m before tax and exceptional costs, though sales increased by 9.1% to £36.4m. In the third quarter Jones says the market began to stabilise and in the fourth, with the order book reversing its long decline, he saw ‘the beginnings of a recovery’.

‘We wanted to use the opportunity to come out fighting and make it a two-pronged recovery,’ adds Jones, ‘so we have continued to invest in R&D. We’re leaner and fitter and ready for a longer-term, if hesitant recovery.’

While 2010 will be ‘all about doing the basics’, with earnings expected to be flat at 11.5p, according to broker Investec, encouraging new opportunities should emerge further ahead, especially in life sciences and aerospace and defense, where contracts, when they come, are large and long-term. Some may surface in 2010 but the majority of pending projects are at the development stage and are unlikely to make an impact next year.

Jones declares that over the next five years ‘the company and customer base will change quite dramatically’. With the shares recovering well from their 30p low early this year but leaving plenty more room to repeat their £5-plus high of 2007, we think there is great long-term potential here. Keep holding.