Some UK stocks have plenty of long-term potential. And, for me, Volex (LSE: VLX) is one of them.
The company is in the FTSE AIM index. But I’m not letting that put me off because not all stocks there are rubbish.
With its share price near 305p, the global supplier of integrated manufacturing services and power products has a market capitalisation around £540m. And that makes it a fairly large operation compared to many of the tiddlers on the FTSE AIM market.
Today, 23 November, the company released its half-year results for the 26 weeks to 1 October. And the headline shouted: “Strong revenue growth and margin expansion underpins confidence in the full year and progress towards five-year plan”.
Is this growth with multi-bagging potential?
Revenue rose by just over 11% year on year. And within that figure, constant currency organic growth was just over 4%. Those advances delivered an underlying earnings improvement of nearly 8%.
That’s growth, yes. But are they the kind of numbers that can turn Volex into a multi-bagger over time?
Maybe. Studies have shown that ordinary-looking businesses in mundane sectors often back some of the best-performing long-term stocks.
Companies don’t have to keep blowing the blooming doors off with whizzy-dizzy profit figures. And they don’t have to be part of flash-sounding sectors like tech or pharma.
Many multi-bagging businesses just need to keep growing steadily and executing well as they go. And Volex looks like it’s on course to do that, at least for the time being.
Part of the excitement regarding the stock is its involvement in the electric vehicle (EV) market.
In August the company said it is a licensed partner of Tesla for the North American Charging Standard (NACS) EV Charging system.
That means Volex is a “selected” global manufacturer of the authentic NACS coupler. And the firm is “stocked and ready” to supply automotive original equipment manufacturers (OEMs) and charging infrastructure suppliers.
Executive chairman Nat Rothschild said the situation validates Volex as a “trusted” manufacturing partner of Tesla and other EV manufacturing companies. So, if EVs take off as hoped, Volex could do well from the business generated.
A short-term setback
However, today’s results show a setback. Some customer destocking occurred during the period as supply-chain issues subsided. A year ago, customers were building up inventory, which caused a strong comparative period.
But now they have increased confidence in lead times. So they are stocking less and freeing up capital within their businesses.
Yet in other areas, things have been growing well for Volex, for example, in consumer electricals, medical, and complex industrial technology. On top of that, Volex has been working to integrate its recent acquisition of Murcat Ticerat, a profitable complex wire harnesses business.
One of the main risks for shareholders here is cyclicality in the company’s end markets. If general economic conditions deteriorate, earnings and the share price will likely fall.
However, the outlook statement today is upbeat. And City analysts predict double-digit earnings advances ahead. On balance, I’d be inclined to embrace the risks and dig in with deeper research now with a view to buying some of the shares to hold long term.
