Share of the week: a dotcom star reborn

Seven months ago, an electronics distributor still worth just a fraction of its dotcom boom valuation grabbed our attention. A recovery in the UK business was underway and big profits were predicted. It duly delivered and, after breaking above technical resistance in August, the share price has surged by almost half.

Electrocomponents, a star of the dotcom boom in 1999-2000, left its claim to Share of the week late, publishing half-year results on Friday. But a 22% rally in response was spectacular and worthy of a second appearance in these pages.

Revenue grew by almost 13% in the six months to 30 September, or by 2.1% if you strip out currency moves and extra trading days. Second-quarter sales more than tripled year-on-year to 3.1%, riven by North America and Asia.

Pre-tax profit was up over three-quarters to £55.1 million, or 45% on an underlying basis, giving underlying earnings per share (EPS) of 9.1p. Also expect £30 million of annualised net savings by March 2018, about £5 million more than previously forecasts.

But there could be much more. "While we have taken a major step forward, we are only just at the beginning of this journey and still a long way from best in class," says chief executive Lindsley Ruth.

"We remain extremely focused on delivering a further step change in the performance of this organisation and are excited about the significant potential for further improvement and growth."

Julian Cater, an analyst at Numis Securities and already a big fan of Electrocomponents, has upgraded earnings forecasts by 10-14% for the next three years, and bumped up his price target from 350p to 420p.

"Since Oct-15 we have raised our FY 2017 EPS forecast by c.40% (13.8p to 19.5p)," says Cater. "But we remain convinced that the EPS upgrade cycle has much further to run as management seeks to establish best in class disciplines, which will both reinvigorate growth and drive greater operating leverage.

"We forecast c.20% EPS CAGR [compound annual growth rate] (FY 2016-20) and consider the current valuation as good value in this context."

Trading on around 21 times forward earnings, Electrocomponents doesn't appear particularly cheap. But factor in that growth rate and it suddenly seem appealing.

Of course, it has to do the numbers, but both the company and City analysts think it will, and more. Investors are certainly confident and pricing in further upgrades, already chasing the shares well beyond Carter's target. It hasn't been this high since the dotcom crash in 2002.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.