Acquisition opportunities are created by a weak economic outlook and a negative investor sentiment

Investors are more likely to focus on the negatives than the positives.

Consider, for instance, increasing interest rates. While they act as a drag to the economy’s rate of growth and suppress share prices through a weakened investor sentiment, rising interest rates provide an opportunity for high quality companies to improve their market position.

While some companies struggle to increase sales and profitability, other companies take advantage of low asset prices in order to make acquisitions.

Investors may consider this a risky move given the uncertain outlook for the economy in the near term, as well as the persistent inflation and tightening of monetary policy.

According to Questor, the current time is a great one for businesses to undertake mergers and acquisitions activity, due to the possibility of a long-term mean return for inflation, growth in economic terms, and corporate profitability.

AIM-quoted Judges Scientific has a business model that is based on acquiring other companies. Between 2005, the year it entered the market for scientific instruments, and its end-of-year 2022 financial report, the designer and manufacturer of scientific tools made 20 acquisitions.

The company’s biggest purchase last year was Geotek. This company specializes in the analysis and interpretation of geological cores used by the mining, hydrocarbon and oil industries.

The Judges Scientific full-year performance was impacted by the purchase in a positive way. Revenue increased by 24pc, and operating profit adjusted rose 60pc compared to last year.

Even when recent acquisitions are excluded, revenue increased by 8pc. The company has also seen a modest growth in its order book. This shows that the company is still performing well, despite the challenging global economy.

In spite of inflation, it was able to keep its organic operating profit margin adjusted at 21pc. The company’s return on equity was over 26pc in the last year and averaged 32pc for the past five. This gives it a competitive edge that is good for its profitability.

The company has acquired two more companies since the end of the financial year. The company’s solid financial standing makes it possible to take on more acquisitions in the medium-term.

Judges Scientific has a net debt-to equity ratio of 72pc. Its net finance costs last year were more than eight times covered by its operating profit. The figures show that Judges Scientific has the ability to not only survive an economic downturn, but also to benefit from the lower asset values it has caused.

The company is exposed to many international markets. North America and Europe account for each 28pc, while China/Hong Kong accounts for 12pc.

According to the OECD it is forecast that global growth will slow down to 2.7pc this year , from 3.2pc, last year. However, in 2024, it will accelerate to 2.9pc.

Further interest rate increases may be limited as inflation in the US, and Eurozone continues to moderate. This could lead to a positive effect on the growth prospects of the global economy, and therefore better operating conditions for the firm.

The company’s shares, which trade on a Price-to-Earnings Ratio of around 25, are not cheap.

Judges Scientific, however, is in Questor’s opinion a company of high quality with a track record of solid financial performance, which is deserving of its premium valuation.

In an era when asset prices are attractive, its solid balance sheet is the basis for future acquisitions that will build on its economic moat. With an improved operating outlook, the company is well-positioned to grow its share price over the next few years.

Questor is adding a new company to its portfolio. While we cannot guarantee that any particular stock will qualify for inheritance tax relief in the end, it’s a good addition.

Breedon, a supplier of construction materials, is being removed to make room for Judges Scientific.

Shares of the company were recently transferred from AIM to main market and no longer qualify for inheritance tax relief. A share consolidation was completed on a five-to-one basis. In July of last year, the company was added to my inheritance tax portfolio and it has since generated a small profit.