One stock I’m holding from the FTSE All-Share Index with ongoing potential is Avon Protection (LSE: AVON).
Is it the best stock to buy in the index right now? I wouldn’t claim that, because that will be different for each investor, but I do like it a lot.
Active in the defence industry
The business is another play on the theme of defence. So, with governments tending to increase defence expenditure, there’s a lot of momentum in the sector.
There’s also plenty happening in the business and with the share price recently, as the chart shows:
The company designs, develops, tests, and manufactures integrated protective systems. The firm’s portfolio includes full-face respirators, ballistic helmets, escape hoods, self-contained breathing apparatus (SCBA) systems, modular powered air purifying respirator (PAPR) units, thermal imaging cameras and underwater equipment.
In late January, the order intake for the first quarter of the trading year was 36% higher than 12 months earlier. The directors said the boost arose because of strong demand for helmets and rebreathers. In one example, the company secured a contract with the German navy – such is the quality of the company’s customers.
At the beginning of 2024, the order book was 21% higher than the prior year figure, suggesting strong operational momentum in the business.
City analysts have pencilled in an advance in normalised earnings just above 31% for the trading year to September 2025. Set against that, the forward-looking earnings multiple is just below 24 with the share price at 1,202p (26 April).
Is that a fair valuation? After all, the FTSE All-Share index is trading on a median rolling price-to-earnings (P/E) ratio as low as about 12.
Recovery, growth, and risks
I’d say the rating here is okay as long as strong growth in earnings continues. One way of judging a fair valuation is by comparing the earnings multiple to the growth rate. If the P/E is at or below the growth rate for earnings, it could be argued the valuation is fair.
However, such methods can be risky. If Avon Protection fails to make its estimates, or if the ongoing growth rate declines, it’s possible for the valuation to rate lower. In other words, instead of the market assigning a multiple of 24, Avon’s P/E could drop to, say, 15.
A de-rating like that can sometimes lead to a falling share price and shareholders may lose money on the stock.
Nevertheless, I’m optimistic that growth may prove to be enduring. On top of that, the company is recovering well and restructuring after a disastrous episode that pulled the rug from under the business and the stock a few years back. The directors ended up shutting down the firm’s body armour business after its products failed US military tests – ouch!
So Avon Protection is a recovery play as well as a growth proposition. However, that painful body armour episode reminds us as investors that stocks and businesses come with risks as well as opportunities. Previous to the debacle, the stock had been high flying.
I’m in this one, though, despite the risks, and see it as a good contender in the FTSE All-Share index for further research and assessment now. It could make an interesting addition to a diversified portfolio.
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Kevin Godbold has positions in Avon Protection Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.
