One of the most exciting FTSE 250 shares I follow is discoverIE (LSE: DSCV). The company is a group of international manufacturers, suppliers, and designers of electronic components.
Its share price has performed very strongly recently, and over the past year. At the time I’m writing, it has risen by 19% today (3 August). While discoverIE continues to grow with new acquisitions in the US and UK, I’m slightly concerned with the recent share placing by the group. Here, I weigh up the pros and cons of discoverIE’s recent takeovers and examine if the share price will continue to rise.
discoverIE acquires Beacon and Antenova
Investor confidence in this FTSE 250 share today has followed the news that discoverIE announced the takeover of two new firms.
One of the companies discoverIE has acquired is Beacon for a cash consideration of £58.8m. Beacon is a US-based designer, manufacturer, and supplier of custom system on module (SOM) embedded computer boards and related software. Beacon supplies the medical, industrial, and aerospace & defence markets in the US and reported a strong revenue of £20.5m in the last financial year.
A separate acquisition has also been made for the company Antenova with an accepted offer of £18.2m. This UK-based company is a designer and manufacturer of antennas and radio-frequency (RF) modules. Antenova has been reporting strong growth, with sales this year expected to be around £8m.
I have confidence that discoverIE can create further growth opportunities with these acquisitions. Both of these businesses have generated good operating margins of 20%. So based on the financial indicators, I am confident discoverIE will profit from these takeovers.
Risks and concerns
To raise capital for discoverIE’s ventures mentioned above, it has placed a total of 5.4m new shares. This generated £55m which was more than the original plan to raise £45m. The electronic component manufacturer said that this decision was made due to high investor demand.
While investor confidence in this FTSE 250 share is encouraging, I’m concerned that this might cause possible problems down the line. The placement of shares could discourage existing shareholders as their shares will become diluted as a result.
Further, the share price is extremely high at £1,232, at the time I’m writing. The price could very well be overvalued as it is carrying a high price-to-earnings ratio of 94.17. If I made an investment now, I could suffer due to a pullback in price in the near future.
Will I be buying?
Buying this FTSE 250 share does come with its risk. I think that with such a high P/E ratio this share is quite off-putting. I also question the value for money I will get on my shares as they have been diluted.
However, dilution of shares isn’t always necessarily bad. Especially if the money is being generated to push effective growth. I think based on the companies that discoverIE has acquired and the financial strength behind them, I’m confident in its decision. I also believe that this makes its share placement more than understandable. Overall, I trust the direction discoverIE are going in, and I would look to add this share to my portfolio.
John Town has no position in any of the shares 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.