I won’t buy TT Electronics shares after they jumped 20%

Shares in electronic components manufacturer TT Electronics have spiked after news that a saliva swab test has been approved. Does that make them worth buying?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Yesterday, TT Electronics (LSE: TTG) shares jumped by 10%, and today they’re up 17% as I write. Shares in the electronic components manufacturer first leapt because TT put out a statement saying the Medicines and Healthcare products Regulatory Authority was in the final stages of registering Virolens for use and sale in Great Britain. Today, approval was granted.

Virolens is a Covid test, which TT is the exclusive manufacturing partner for. The test is developed by a company called iAbra.

But after the share price jump, would I add TT Electronics shares to my portfolio? Could there be further for the share price to rise?

It’s worth noting that over the last five years, the share price has risen by 55%, over the last 12 months the rise has also been 55%. That 55%, over the longer timeframe, is far less than many FTSE 100 shares and quite low growth for a company with a market capitalisation of only around £400m. 

Reasons for the rise in TT Electronics shares 

TT itself has said that there’s no certainty, even after the approval, of the financial impact of Viorlens. So in itself, it may not add much to the company and is dependent upon iAbra’s sales. On top of that, much of the interest in Virolens so far has been outside Britain. Other regions will also have to give regulatory approval.

More worryingly, iAbra’s integrity and test accuracy has been called into question before, when a release last year contained factual and data errors. In an increasingly competitive marketplace, that lack of transparency or accuracy might really sway the regulator or future customers. To invest in TT Electronics based on this contract, I’d want to be very certain that iAbra’s test is vastly superior to other saliva swab tests. So far, I don’t know if it is, despite today’s approval.

I think that in the long term, TT Electronics’ share price will be determined more by its core business and so that’s what I’ll focus on when deciding if the shares are worth adding to my portfolio.

One for the long term? 

So, stripping out speculation over the Covid test, which may or may not add significant revenues in the future, is TT a good business? 2020 understandably was a difficult year with operating profit falling 27% and operating margin falling to just 6.4%. Net debt has risen to £83.8m.

Looking back to growth the previous year between 2018 and 2019, it was lower than I’d like. While revenue growth was good, profit and earnings per share growth wasn’t. The latter went from 8p to 8.5p, if you only look at continuing operations. Gross profit went from £110.7m to £116.6m, an increase of only 5.5%.

On the flip side, the company has customers in growth markets, spends heavily on R&D, invests in growing by making acquisitions and does have strong cash conversion of 130%. Leverage, or the level of debt, is also within management’s preferred range at only 1.6x, which is very comfortable.

A final word on the shares

For me the shares don’t deserve to be on a P/E rating above 15, let alone around 18 where they sit now. That looks expensive given the growth rate of the company. For me, the  jump in the share price has made the shares even more risky and I won’t be adding them to my portfolio.

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.

Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

A pastel colored growing graph with rising rocket.
Investing Articles

How much passive income could I make for every £1,000 invested in Aviva shares?

Even a relatively small investment in Aviva shares could generate much greater passive income, particularly if the dividends are reinvested…

Read more »

Close-up of British bank notes
Investing Articles

I’m considering 100 shares in this FTSE 250 gem to aim for £300 a month in dividends

Mark Hartley outlines why a lesser-known banking stock from the FTSE 250's worth considering for an income portfolio in 2024.

Read more »

Investing Articles

History suggests these UK shares might soar if interest rates are cut in August

Some UK shares could rocket if interest rates fall from its 5.25% high next month. And there's one our writer…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

Here’s why H1 results could boost the AstraZeneca share price

The AstraZeneca share price has been a success story in the past five years. With H1 results due, can it…

Read more »

Investing Articles

£17,365 in savings? Here’s how I’d use it to target a £6,700-a-month passive income

Here's how a lump sum investment could pave the way for me to make a four-figure monthly passive income in…

Read more »

Investing Articles

Down more than 10% in 6 months, Fools are backing these 5 UK stocks to reverse that – and then some! – by 2025

Some of our UK free-site writers have put forward their candidates for turnaround stocks!

Read more »

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »