US Edition Electrocomponents
260.6p -4.4
Questor says BUY
Indeed, some brokers have said they will have to increase forecasts by as much as 20pc after the company's excellent operational performance in the first half.
The group is the world's largest distributor of electronics and maintenance products, with more than 500,000 different components in its range. The company has continued to invest in its business through the downturn – particularly its e-commerce operation and increasing its product range – putting it in a strong position for the upturn.
Electrocomponents also benefits from operational leverage. It has a relatively fixed cost base, so increasing sales means that profits increase sharply in an upturn. The company reduced its costs in the first half by five percentage points to 37pc of sales.
This leverage led to pre-tax profits jumping by an impressive 103pc in the first six months of the year to £50.5m on revenues that rose 24.4pc to £563.3m. Sales growth in regions of the world
was in the double digits. The news sent the shares to a three-year high.
The key to Electrocomponents' future profit growth is its international profile and internet sales. The international business now makes up 70pc of sales and saw growth of 30pc in the first
half of the year. Growth in e-commerce sales was 42pc in the period, with internet sales in the US more than doubling.
In the first half of last year, internet sales were 41pc of total sales, but this rose to 47pc in the first half of this year. At the very end of the period, online sales accounted for 48pc of its total business. The company has a target of 70pc of sales coming via the web – and it is obviously making progress.
When Questor spoke to chief executive Ian Mason yesterday he was bullish on business prospects. He plans to target emerging markets such as China and eastern Europe.
The shares are trading on a March 2011 earnings multiple of 16 times, falling to 14.1 in 2012. This is arguably a high rating,
but Electrocomponents is executing its strategy well and its markets are definitely improving. Growth stocks also warrant a higher rating, and the company fits this bill.
The yield is 4.4pc, so well worth having. This means the shares are a dividend play and a growth story.
Investors who bought the shares on the initial recommendation would have locked in a yield of 8.3pc, so should consider themselves long-term holders of the shares. The investment is up 86pc since the initial tip on July 19 last year at 140¼p, compared with a FTSE 100 up 30pc.
The shares remain a buy for the income and growth prospects.