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176% rise in 4 days! is the De La Rue share price a good buy?

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FTSE All-Share manufacturer De La Rue (LSE:DLAR) has seen a spectacular share price rise this week. The company prints money and provides product authentication solutions to governments and international businesses.

Fears of cross-contamination had caused a decline in cash use throughout the world. There were even reports China was disinfecting and quarantining all its banknotes for two weeks as it took them out of circulation. This decline caused the De La Rue share price to crash spectacularly in March. However, a positive trading update this week brought it rocketing back up 176% since Monday.

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Is the De La Rue share price rise sustainable?

Although the coronavirus crisis has discouraged the use of cash all over the world. De La Rue has continued to experience demand in its currency division. It has been awarded contracts worth nearly 80% of its available full-year currency printing capacity for both its authentication and currency units. These include a five-year agreement to print pages for the new Australian passport.

As an expert in brand protection, De La Rue has also won a contract to authenticate and protect the Covid-19 testing kits of an international customer, along with protection for a Covid-19 immunity certification scheme. And since March, the authentication division has won contracts with a lifetime value of over £100m.

The company is also focusing on continuing to improve its portfolio of offerings and become more competitive. It will release its full-year results later this month, but it seems the pandemic has had a lesser impact on the company than first expected.

A short squeeze

But De La Rue has had a tough time in recent years. It has a price-to-earnings ratio of 7 and earnings per share are 16p and while these financials may sound tempting, its net debt remains high after skyrocketing in 2019. In 2017, the De La Rue share price was peaking above £7 a share. At £1.26 it has fallen far from those dizzy heights. Losing the contract to make UK passports dealt it a significant blow last year, and it scrapped its dividend. 

Was it this week’s positive announcement alone that caused the share price to spike so quickly? Not likely. One reason for the two-month share price suppression was pressure from short-sellers. With fears of cash decline in play and previous company problems still fresh in the mind, this stock looked like it was on a downward spiral and short-sellers were having a field day. However, all was not as it seemed. The realisation that the pandemic had a limited effect on the company, along with its recent contract wins, caused the short-sellers to panic and scramble to get out of their positions. This pushed the share price up rapidly.

So would I buy? Although recent contract wins and its prestigious customer base seem promising, I still do not think the De La Rue share price is a good buy.

The share price is already down 7% today as I type. All-in-all I think its high level of debt and lack of dividend make this an unappealing share for a long-term investor’s portfolio.

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Kirsteen has no position in any of the shares mentioned. 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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