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The Volex (VLX) share price just tumbled 10%. Is the stock doomed?

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The share price of Volex (LSE: VLX) crashed by almost 10% yesterday. It was a painful one to take as I already own the stock. It’s the risk I have to take as an investor, and unfortunately days like this do happen.

I can’t be too disappointed as the shares are up over 30% this year, even after yesterday’s fall.

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But it was the release of the company’s half-year report that caused the stock to tumble. Let’s take a look at what was in the results to see whether there was anything concerning.

A recap on the results

I was impressed when I first read the results before the market opened. Revenue grew 44.5%, coming in at $292.7m. Underlying operating profit was up a respectable 31.3%, too. Management said that the revenue growth reflected high levels of customer demand in all sectors. All sounds positive so far.

Analysts have been upgrading their estimates for the company recently. Full-year revenue forecasts stand at $556.25m, and operating profit at $54m. After today’s results, the aggregate share price target across the three analysts reiterating the stock as a ‘buy’ is 503p. Having closed at 403p yesterday, there could be almost 25% upside in the share price based on this price target.

Growing EV demand

One of the first reasons I bought shares of Volex was due to its exposure to the booming electric vehicle (EV) market. Volex is a leading manufacturer of EV charging plugs. I’m predicting significant growth ahead for Volex as the EV market expands.

In the results yesterday, sales in the company’s EV division surged 210% year-on-year. Management said this was due to Volex’s strong market position and expansion into other related products. The EV division represents a fairly meaningful 15% of the total revenue today, but I think this could be much bigger in the months and years ahead.

Outlining the risks

It was a little surprising to see the share price drop 10%. But things weren’t all good.

For one, margins were squeezed at the gross and operating level. Gross margin dipped to 21.3%, and operating margin fell from 10.3% to 9.3%. Management said the business experienced increased freight and copper costs during this six-month period. I do expect the ongoing global supply chain disruption to impact Volex in the months ahead.

I was also concerned that earnings per share (EPS) only grew 7.8%, in contrast to the 21.5% growth in underlying profit before tax. There is ongoing dilution from share options which means EPS will not grow in line with the cash profits. Almost half a million share options were awarded to senior management at nil cost in December last year, which isn’t great to see as a shareholder.

Final thoughts

Overall, I’m happy to continue holding shares of Volex. The business is growing, and I see huge demand in the EV space going forward. Management are buying more shares in the open market too, which shows confidence in the business. The stock is on a forward price-to-earnings ratio of about 20, so it does look fairly valued. I would look to buy more shares on any further dip.

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Dan Appleby owns shares of Volex. 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.

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