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.
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’.
