On Wednesday 7 June, DiscoverIE (LSE: DSCV) shares were the second-highest performers in the FTSE All-Share Index, rising by almost 15% in just one day. And over a year, the stock’s up about 28%.
The company has an international business that designs and manufactures customised electronic components for industrial applications.
That’s just the kind of workmanlike enterprise that may perform well in the bull market as it gathers pace in the months and years ahead. And I feel certain that an enduring spell of prosperity is on the way for many businesses.
Positive signs
So that strong share price action was a good start. And it takes the stock to the top of a recent trading range – or share price consolidation – which I see as another positive sign.
The reason I’m fond of share price consolidations is because they tend to indicate that there’s little consensus in investor sentiment. And the bulls and bears are fighting it out. Meanwhile, value can build in a business while the shares are treading water. And that can help to propel the shares higher later.
However, it takes sound underlying operational progress to drive stocks higher if the advance is to stick. And it’s worth remembering that if the news flowing from a business disappoints, a stock is likely to move down from a consolidation rather than up.
But to the investor focused on the long-term performance of businesses, none of this stuff matters much. What really counts is the fundamentals of the enterprise, its valuation and its forward-looking prospects.
Good trading
And the news is good with DiscoverIE. The preliminary full-year results report released on the 7 June headlined: “Strong growth in sales & earnings; medium-term operating margin target raised to 15%.”
The company’s trading year ended on 31 March and sales came in 15% higher than the prior year. Underlying earnings per share jumped by 20%. And the directors rewarded shareholders by slapping 6% on the full-year dividend.
So far, so good. And my guess is the positive performance is a sign of more to come as economies recover.
Chief executive Nick Jefferies pledged to continue to aim for organic growth in “high momentum”, sustainable markets. And on top of that, the company plans to work hard on its acquisitions programme.
According to Jefferies, the current trading year has started well for the business. And the order book is at a higher-than-expected level.
A full valuation
Positive progress is never guaranteed with any business. But City analysts are optimistic. They’ve pencilled in modest single-digit percentage uplifts for both earnings and the dividend in the current trading year.
Meanwhile, debt seems to be under control. However, the valuation looks quite full. And that adds risks for investors. With the share price 913p, the forward-looking earnings multiple is just above 26 for the current year.
Nevertheless, there’s a lot to like about this business when considering quality metrics. And I’d be inclined to keep the stock on watch with a view to conducting deeper research, particularly on dips and down-days. My hope would be that the DiscoverIE may prove to be a worthwhile hold for the long term.
