Evolving XP packs big profit
YOU plug a piece of equipment into the mains. You switch it on. It starts up. Simple, isn't it?
In most cases, it's not quite that simple. Yes, the equipment needs electricity, but very often in a different form from that provided at the mains. Voltages may need to be higher or lower. Alternating current may need to be converted to direct current.
And that is where XP Power comes in. The company, in its own words, 'provides power supply solutions to the electronics industry'. It supplies the hardware that goes into electrical equipment to convert the electricity supply into a useable form.
Of course, really big manufacturers of electronic equipment will make the necessary components in-house. But there are plenty of mid-tier companies in areas as diverse as defence, aviation, communication, medicine and industry that prefer to buy something in from an independent supplier.
XP has evolved over the past five years. It used to be a distributor of other firms' products.
Now, most of its work comes from being what is described as a 'virtual manufacturer', where it designs the products and specifies exactly how they should be made.
Third parties manufacture the goods Third parties manufacture the goods and then XP markets them under its own name. Last year wasn't easy for XP. Sales rose by only 4%, largely a reflection of a slowdown in the industrial electronics market that the company supplies.
But when the firm announced its annual results last month, chief executive Duncan Penny indicated that 2006 had started well and analysts are now reasonably confident that this year will see stronger growth in sales.
Profit margins are high. XP's sales last year were a shade under £70m, divided roughly equally between America and Europe. And the gross profit margin - before meeting XP's own costs - was almost 36%.
XP has a credible target of lifting that to 40% by the end of 2008 as it increases the share of its sales under its own name with its unique technologies.
Profits approaching £9.4m should be within grasp for 2006, with something above £10.5m for 2007. Those figures would give earnings per share of 36.1p this year and more than 40p for the following 12 months.
• Midas verdict: XP Power is well positioned in a niche market. An added attraction is the dividend, which is likely to be 18p this year.
The company's current share price of 442p fails to reflect its growth prospects. Buy.
Midas update
INVESTORS who were brave enough to buy the stocks suggested in our Midas New Year Courageous Portfolio can celebrate this weekend.
We tipped three shares for investors with an appetite for risk - Cambridge Antibody Technology, PolyFuel and Northern Petroleum.
Since January 1, Cambridge Antibody has risen roughly in line with the stock market as a whole. PolyFuel shares stood at 52p on the last trading day of 2005, and rose to 56p on January 3 after our recommendation. They are now 99½p, a meaty 78% gain for Midas followers.
But the real star has been Northern Petroleum. We tipped the shares at 58½p and they have climbed steadily since. But they rose sharply on Friday after
Northern published the results of a study of five Dutch onshore oil and gas fields where it holds a stake. Reserves now appear to be far greater than the market had expected. The shares leaped 46½p on Friday to close at 141p.
We have warned that shares in small oil and gas explorers can be volatile. But we are still happy to hold on to Northern in the expectation of further gains.
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