The FTSE 100 as a whole has proven to be remarkably resilient to the ongoing macroeconomic environment. Since the start of 2023, the index has remained flat, which is significantly better than the FTSE 250, which dropped by almost 10% over the same period.
However, the same level of resilience can’t be said for all constituents. And RS Group (LSE:RS1) seems to be facing investors’ ire, with shares dropping by nearly 25% in the last 12 months. But with the price-to-earnings ratio (P/E) now at just 12 times, has a lucrative buying opportunity emerged for long-term investors?
Simplifying supply chains
As a quick reminder, RS Group, formerly known as Electrocomponents, acts as a middleman in customer’s supply chains. The manufacturing sector is becoming increasingly more complicated. As such, securing the critical components and raw materials needed to produce goods on time is becoming quite a headache.
This business seeks to solve this by establishing relationships with thousands of suppliers worldwide. The goal is to become a one-stop-shop solution for manufacturers to source almost all their components from RS Group. And it’s proven to be quite an impressive business model that nurtures sticky relationships with both suppliers and customers.
Subsequently, average revenue growth over the last five years now stands at a respectable 12.6%. And through various efficiency investments by management, earnings have grown by a faster 18.4% over the same period on the back of widening margins.
But if that’s the case, then why have shares been heading in the wrong direction this year?
What’s going on with the stock price?
Considering the importance of the role RS Group plays for corporations worldwide, it begs the question as to why shares are now heading in the wrong direction. The answer is fairly straightforward – manufacturing demand is currently shrinking.
With inflation placing pressure on household budgets, sales of electronic devices, in particular, have fallen. This decline has been passed down the value chain, and in RS Group’s latest quarterly results, sales came in lower than expected.
Understandably, this seems to have spooked investors. However, when taking a long-term view, this pessimistic outlook is only temporary. In fact, looking at the Purchasing Managers Index (PMI), which serves as a proxy for the manufacturing sector, demand seems to be trending back in the right direction.
This may just be a slight pause as we approach the holiday season. But even if that’s not the case, the manufacturing industry is likely to stay around for decades to come. And like any cyclical sector, investing in top-notch companies during a down period is a proven strategy for achieving superior returns.
So while the short-term is still riddled with uncertainty, I’m tempted to add this FTSE 100 enterprise to my portfolio once I have more capital at hand.