US Edition Electrocomponents
195.7p -1
Questor says HOLD
Obviously, as concerns about the global recovery grow, there are concerns about growth at the company. However, Electrocomponents' business has held up pretty well – with last week's half-year numbers coming in ahead of expectations. But it's the future that has prompted investor concern.
In the six months to September, revenues rose 11pc to £625.5m and pre-tax profits were up 17.6pc to £59.4m. The interim dividend was maintained at 5p a share and it will be paid in January.
However, the market has been spooked by bad news from a smaller rival and the fact that sales growth is slowing because of tough comparators.
In October, group sales growth was similar to September at 5pc, with the international business growing at 6pc and the UK at 2pc. Within the international business, continental European sales rose 5pc, North America was up 5pc and Asia Pacific by 11pc.
The UK performance represents a turnaround from September, when sales fell 2pc. However, recent economic data for the UK has been gloomy, so there are some clouds on the horizon for UK plc. October's manufacturing purchasing managers' index (PMI) slumped into contraction, surprising economists. Because of the nature of Electrocomponents' business, it does not have a forward order book, so sector watchers keep a close eye on PMI figures as a leading indicator.
However, the UK business makes up 30pc of total sales, with the international division accounting for 70pc.
It is important to remember that this is an issue of declining revenues growth, not declining revenues. This follows impressive sales growth last year. Strong comparators are expected for the next two quarters. Ian Mason, chief executive, believes the company is well positioned to get through any slowdown – which he believes will hit smaller rivals much harder.
Also, at a time of global cost- cutting, the group's exposure to maintenance operations is important – and it has not suffered the same slowdown in sales growth that has been seen in electronics as businesses automate their processes to cut staff costs.
During the first half of the year, Electrocomponents' maintenance sales grew by 11pc, supported by the launch of 4,000 new products. In its electronics offering, 20,000 new products were added to the company's catalogue.
The group's move to an e-commerce sales platform has also been helping control costs – and there is plenty of scope for increased penetration, especially in the US. In North America,
e-commerce is 41pc of total sales, compared with 58pc in the UK and 60pc in Europe.
The shares are trading on a March 2012 earnings multiple of 10.5, falling to 10.3 and yielding 6pc. The company is highly cash- generative, so the dividend does not appear to be at risk.
The investment is up 39pc since the initial tip on July 19, 2009, at 140¼p, compared with a FTSE 100 up 19pc. However, shares in Electrocomponents have also been tipped as high as 285p before the recent market rout.
There is no doubt that the global economy is going through another wobbly patch – and consumers are becoming more cautious.
However, the group's balance sheet is strong, it is continuing to take market share off smaller rivals and the business is well managed. But until we get some clarity on the direction of the global economy, the rating remains hold.