This FTSE 250 growth stock could be a great buy after today’s news

Paul Summers takes a look at the latest trading update from this under-the-radar company.

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With markets looking skittish and some commentators forecasting an imminent end to the bull market enjoyed by investors for so many years, it’s understandable if those focused on finding top growth stocks are feeling a little cautious.

Should you believe that such fears are overdone, however, there still appears to be a decent number of opportunities out there, one of which reported to the market this morning.

Strong revenue growth  

The share price of Electrocomponents (LSE: ECM) rose sharply in early trading as investors buzzed over an encouraging trading update from the FTSE 250 constituent. 

Like-for-like revenue rose a healthy 10% in Q4 to the end of March, with particularly strong growth (15%) seen in the company’s operations in the Asia Pacific region. 

When the whole financial year is taken into account, total revenue climbed 13%, with double-digit growth seen in all the five regions Electrocomponents operates in. Thanks to this, and “better than expected performance in gross margin“, management now believes that full-year adjusted pre-tax profit will come in ahead of the range previously predicted by analysts.

Positively, Electrocomponents confirmed that it had seen “strong year-on-year growth” in free cash flow over the second half of its financial year. Having achieved annualised savings of £30m through the completion of the first phase of its Performance Improvement Plan, the company stated that it would reveal details on how it intends to become even more efficient when it announces full-year results next month.

While a price-to-earnings (P/E) ratio of 21 for the 2017/18 financial year before today suggests that quite a bit of good news is already priced-in, I’m heartened by the company’s continuing efforts to simplify operations, strengthen its balance sheet, grow online sales and develop its RS Pro own-brand business.

Shares are still some way off the 700p highs reached towards the end of last year. If you believe that markets aren’t about to fall off a cliff anytime soon, Electrocomponents warrants attention.

Powering ahead

Another growth stock that is worthy of consideration is critical power control component manufacturer XP Power (LSE: XPP). Since selecting the company as my ‘top pick’ in June last year, the shares have been in decent form — rising 24% in value.

Last month’s record-breaking final results suggest there could be further upside ahead. Revenue climbed 22% in constant currency to £166.8m in 2017 with over three-quarters of this coming from the company’s own-designed products. Adjusted pre-tax profit rose 26% to £36.1m.

According to Chairman James Peters, the company has started 2018 with a “strong order backlog“, even if — in his words — XP Power “cannot be immune from all external economic shocks resulting from cyclicity in the capital equipment markets” it serves. A second production facility in Vietnam is due for completion and the business will also benefit from a full year’s trading from Comdel, the newly-acquired electronic parts supplier.

Aside from recent trading, another thing that I really like about it is the consistently solid returns it has been able to achieve on the capital it invests. At 22% for the last financial year, this is far higher than some industry peers.

Trading at 20 times forecast earnings for the current year, shares in XP certainly aren’t cheap, but this price might just be worth paying if the aforementioned momentum can continue.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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