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Why the ALS Ltd (ASX:ALQ) share price is surging ahead today

There’s nothing like a profit upgrade to cut through the sea of red!

The ALS Ltd (ASX: ALQ) share price rallied and is among the best-performing stocks on our market this morning after the laboratory testing services group released its first-half earnings results.

The ALQ share price jumped 2.5% to $8.15 and is the fourth-best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index in late morning trade.

Only the Saracen Mineral Holdings Limited (ASX: SAR) share price, Bellamy’s Australia Ltd (ASX: BAL) share price and A2 Milk Company Ltd (ASX: A2M) share price are performing better, but not by very much.

Result highlights

ALQ reported a 30% increase in underlying net profit to $93.3 million as revenue improved 15% to $826.1 million for the six months ended September 2018.

The company also upped its dividend by 3 cents to 11 cents per share.

Brokers will be busy upgrading their forecasts for the company as the net profit figure was ahead of management’s initial forecast of $85 million to $90 million that it gave in August.

The resurging mining sector is fuelling ALQ’s stronger-than-expected growth with revenue from its mineral testing services division increasing 24.8% and its earnings before interest and tax (EBIT) margin expanding to 26.7% from around 23%.

Its Life Sciences business also recorded revenue growth of 11% as its EBIT margin dipped slightly by 20 basis points to 15.1%, although management is confident that the margin will improve by 50-100 basis points on a full year basis.

The Life Sciences division contributes around 49% of group revenue while the Commodities business makes up 38%.

Its smallest division, Industrials, isn’t performing quite as well although it did manage to eke out a 6.6% increase in sales even as EBIT fell 16% due to increased competition and changing revenue mix.

Nonetheless, this is a good result and confirms to investors how well placed ALQ is to benefit from the ongoing mining activity boom.

The same can’t be said for all services companies such as Downer EDI Limited (ASX: DOW) as the diversified engineering group looks for options on how it might rid itself of its underperforming mining services wing.

Is the stock cheap?

ALQ looks like good value in my books even though the stock won’t be considered a bargain as it is trading on a FY19 consensus price-earnings (P/E) multiple of around 20 times.

However, the multiple is justified given its likely to generate strong double-digit earnings growth for the next two years, if not longer.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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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