Shares of Electrocomponents (LSE: ECM) have moved higher on a positive trading update today. The global distributor for engineers reported underlying revenue growth of 14% for the four months to 31 January and said it’s confident of delivering “strong progress” for its full financial year, which ends on 31 March.
At a current share price of 622p (up 1.7% on the day), this FTSE 250 firm has a market capitalisation of £2.75bn. I reckon now could be a good time to buy a slice of the business.
Improving performer
In today’s update, Electrocomponents said it saw top-line growth across all five of its regions. On the profit front, it advised it remains on track to deliver a stable gross margin for the year. The consensus of City analysts is for this to feed down to a pre-tax profit of £164m and earnings per share (EPS) of 26.6p — 27% ahead of last year. This gives a price-to-earnings (P/E) ratio of 23.4, which looks reasonable value to me in the context of the EPS growth.
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At the end of the current financial year the company will have completed the first phase of its Performance Improvement Plan and delivered cumulative annualised savings of £30m. Furthermore, management said today: “We still believe we have a significant further opportunity to improve efficiency and reduce complexity, allowing continued strong growth at higher operating margins.”
The momentum in the business, the group’s wide geographical diversification and a continuing positive market backdrop all lead me to a favourable view of the outlook for Electrocomponents.
Jaw-dropping achievement
The rise of premium mixers company Fevertree Drinks (LSE: FEVR) has been truly phenomenal. An idea of the scale of its success can be gleaned from a comparison with soft drinks group AG Barr, whose brands include Irn-Bru, Rubicon and Strathmore.
Barr made a profit of £33m over the last 12 months. Fevertree topped it with £37.5m. The companies having been founded in 1875 and 2004, respectively, the jaw-dropping fact is it’s taken Fevertree just 13 years to exceed what it’s taken Barr 142 years to achieve.
Difficult call
At a current share price of 2,400p, AIM-listed Fevertree has a market capitalisation of £2.77bn, which compares with FTSE 250-listed Barr’s £0.76bn. Fevertree trades on a P/E of 62.8 based on forecasts of 38.2p EPS for its latest financial year. The Irn-Bru maker’s P/E is 21.8.
The question of whether Fevertree’s sky-high P/E is justified by its phenomenal growth is one that writers at the Motley Fool have divergent views on. For example, Roland Head has argued that Fevertree could still be a buying opportunity, while Peter Stephens has it down as a stock to avoid like the plague.
I think it’s a difficult call. Analysts expect EPS growth to slow to 10% for 2018 and 15% for 2019, as the company accelerates investment in international expansion, with the North American market appearing to be a particularly prominent ambition.
However, any hiccup or setback in executing its strategy could see the shares severely punished, because they’re trading on such a high rating. The same could be true in the event of a broad market correction, which is looking increasingly overdue. Add into the mix the fact that Schweppes has decided to fight back aggressively in Fevertree’s home territory and I lean towards rating the stock a ‘sell’.
