It has been a tough few years for FTSE 250 firm Victrex (LSE: VCT).
The polymers specialist has seen its share price fall by 27% in one year. Over five years, the decline has been 58%.
The thing is, I think Victrex has a lot to like about it as a business.
If that becomes clearer again this year, allaying some City fears about risks the business faces, I think the FTSE 250 share could merit a higher price.
To start, I will explain what I like about Victrex (and why I am a shareholder in it).
A Warren Buffett-like moat
The main reason I like Victrex is that it has the sort of business “moat” billionaire Warren Buffett often enthuses about.
It makes high performance polymers that are used in all sorts of applications where safety is crucial, from aerospace to automobiles. That means that quality is a paramount consideration for customers, giving suppliers pricing power.
On top of that, Victrex makes a number of proprietary polymer products that effectively mean it is the only choice for customers with certain specific needs. Again, that gives it pricing power.
In turn, that has helped the company generate sizeable excess cash to pay dividends. The current dividend yield is 5.8%.
An increasingly tough trading environment
So far, so good.
For a long time, that business model was akin to a license to print money.
Victrex has had a difficult few years that have called into question whether it can sustain its past success (and profit margins). Post-tax profit last year was 77% lower than two years before. Revenues in the same period slid by 12%.
As industrial applications evolve, a key risk facing Victrex – and it is one I continue to see – is whether demand for the sorts of polymers it makes will stay strong, or decline.
Signs of a potential turnaround
So it is understandable that investors were cheered by some elements of the company’s full-year results, published last month. Yes, revenues before tax were down and pre-tax profit was down badly.
But there was, at least, volume growth.
Some of the recent earnings drops can be pinned on the startup costs of new manufacturing facilities in China. Now they are operational, hopefully they can turn from a loss centre to a profit centre for the FTSE 250 firm (though one risk I see is intellectual property leakage).
What about the volume story?
Higher volumes but lower revenues typically point to either a change in the mix of products sold, or declining pricing power. The company pinned this on exchange rates and weaker performance in its higher margin medical division, affecting its overall sales mix.
So, if the product mix gets back to a more normal one (with stronger contribution from medical products) and volumes continue to grow, 2025 could see both revenues and profits grow at Victrex.
If that happens, I think it could be good news for the Victrex share price. Having taken some profits following last month’s announcement, I continue to hold my long-term Victrex stake for now.
