There are some businesses I own because their appeal lies in my understanding of their products. Concurrent Technologies (LSE:CNC) isn’t one of them. The company designs and manufactures high-performance embedded computing systems for applications in scenarios where failure is an unacceptable event. Think defence, aerospace, and industrial applications; environments where reliability is highly prized. Concurrent occupies a specialist niche serving customers in these sectors who often have demanding technical requirements and lengthy procurement cycles, and my long-term focus is on whether Concurrent is genuinely transforming into a durable compounder. My focus is on whether Concurrent is genuinely transforming into a durable compounder.
For long-term investors like me, this presents an interesting proposition. Businesses operating in specialist markets often benefit from structural barriers to entry; it’s simply hard to do what they do, with the speed and reliability they do it. Engineering expertise, significant product qualification processes, and close customer relationships can prove just as durable as famous consumer brands.
My attraction to Concurrent was never really about high growth but rather the combination of technical capability, disciplined management and more recently, exposure to defence markets in an era of increasing geopolitical instability. In their latest trading update, the company reported record first half revenue of approximately £23 million, pre-tax profit of approximately £3.3 million and an order intake of nearly £47 million, more than double their first half last year. New design wins carried an indicated lifetime value of £129 million. As a shareholder since 2021, this was another encouraging update, but my long-term focus is on whether Concurrent is genuinely transforming into a durable compounder.
It’s tempting to conclude that my original investment case is continuing to strengthen, but I do have a few words of caution. Orders aren’t the same as profits. Design wins aren’t the same as cash flow. Specialist product procurement is notoriously long-winded and many programmes are delayed, cancelled or otherwise altered for reasons entirely outside of a supplier’s control. As an investor, I’m therefore cautious about extrapolating one strong trading statement too far into the future.
As regards their long-term potential, it’s undeniable that many companies can produce a few years of impressive growth but far fewer can continue allocating capital sensibly whilst expanding into new markets, maintaining attractive returns on invested capital and resisting the temptation to chase revenue at the expense of quality. Concurrent has several encouraging signs on this front.
The company has consistently invested in research and development, expanded its product portfolio and developed a broader international footprint.. Geopolitical tensions have reinforced the importance of defence as a budgetary line item for governments, and this is painting a supportive backdrop for many specialist suppliers. None of these developments guarantees future success, but together they give me more confidence that demand is supported by structural rather than cyclical forces.
At the same time valuation remains important. Even an exceptional business can become a disappointing investment if purchased at too optimistic a price. I therefore find it more useful to think about the quality and durability of the franchise than to speculate on whether next years’ earnings will exceed expectations by a few percentage points. The difficulty is that the better Concurrent becomes, the more investors are likely to recognise those qualities in the price. That creates a familiar problem: improvements in the quality of a business do not necessarily imply an improvement in the prospective return from its shares. Even an exceptional company can become a disappointing investment when too much future success is already reflected in the valuation.
What I’m Watching
Ultimately, I continue to view Concurrent as a company moving in the right direction. The latest trading update strengthens that impression, but looking forward, I’ll be looking for evidence that:
1. Revenue growth continues to translate into higher free cash flow.
2. Margins remain resilient as the business expands.
3. Design wins convert into production revenues, repeat orders and long-lived customer relationships.
4. Management continues to allocate capital with the same discipline.
For investors willing to take a truly long-term view, these issues are much more important than the next trading update. As ever, long-term investing is less about identifying a company having one particularly good year than recognising a business capable of creating value for many years to come.