Volex’s share price just surged. But I’d still buy the stock today

Volex just posted a great trading update and its share price has spiked. Yet Edward Sheldon thinks it can go much higher.

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Shares in UK manufacturing company Volex (LSE: VLX) – which specialises in high-performance power cords and cables – have exploded today. Just before lunchtime, the share price was up 16.6%.

Here, I’m going to look at why VLX shares have surged. I’ll also explain why I’d be happy to buy the small-cap stock for my portfolio, even after the big move higher.

Why Volex’s share price just popped

The reason Volex’s share price has jumped is that the company published a very encouraging trading update for the 52 weeks to 3 April this morning.

There were a number of positives in the update. For starters, Volex said revenue for the year is expected to be in excess of $605m. That’s well above the consensus forecast of $561m, and represents growth of 37% year on year.

Meanwhile, underlying operating profit is expected to be in excess of $55m, representing growth of about 28% year-on-year. It added that it had seen a significant contribution from the electric vehicle (EV) sector, where revenue had almost doubled.

Inflation and supply chain issues

The group also said it’s handling inflation and supply chain problems effectively. In terms of inflation, it said its relationships with customers have enabled it to pass through increased costs to them, protecting profitability. As for supply chain issues, Volex appears to actually be benefitting here as its customers have been bringing forward orders in an effort to secure manufacturing capabilities.

Additionally, management is confident in its future, saying the group is well positioned to navigate the challenges of the dynamic macro environment.

We have delivered an excellent performance in a challenging environment and are now well ahead of the five year plan we set out in October 2019. This is a validation of an effective strategy which has created a resilient and diversified business. We continue to pursue a number of exciting organic growth opportunities, while successfully acquiring and integrating compelling acquisitions, leaving us well placed for the future,” said executive chairman Nat Rothschild.

Overall, it was a very good update and I’m not surprised the share price jumped. It had fallen significantly since late last year and even after today’s rise, it’s still down about 16% over the last 12 months.

Why I’d buy Volex shares today

The thing is though, I see plenty of potential for further share price upside here. Volex is a high-quality company. It has exposure to a number of high-growth industries including the EV, data centre, and healthcare markets.

I’m expecting the company to generate substantial growth in the years ahead as these markets expand. It’s worth noting that management has ‘skin in the game’ as both Rothschild and COO John Molloy own a ton of the stock.

Yet the valuation here is very low. Currently, the consensus earnings forecast for this financial year is 28.8 cents (roughly 22p). That puts the stock on a forward-looking P/E ratio of under 13. That looks like a steal to me.

Of course, there are risks to be aware of. A manufacturing slowdown due to a recession is one. Weak sentiment towards small-cap stocks is another.

All things considered though, I think the stock looks very attractive right now. At the current valuation, I’m a buyer.

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.

Edward Sheldon owns shares in 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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