Electrocomponents is no match for Amazon, but these are exciting times
Distributor of tech gadgets has been reborn and enjoys double-digit growth, writes James Ashton
THE trouble with being likened to Amazon is that the numbers don’t always add up. Take Electrocomponents, the once-dusty distributor of radio parts and other widgets, or the “Amazon of electronics” as it doesn’t seem to mind being called these days. It is true that the company keeps delivery men and women busy, sending off more than 50,000 parcels a day. But it has some way to go to emulate Amazon, which by some estimates ships an astonishing 1.6m packets in a 24-hour window.
These are heady times for the FTSE 250 company that looked to have dozed off until American chief executive Lindsley Ruth arrived in 2015. On his watch, the shares have powered up to levels not seen since the dotcom boom. That was until earlier this month, when Electrocomponents was a big casualty of the market correction that shook stocks as traders took fright at the Federal Reserve’s plans for higher interest rates. At least it managed to outdo Amazon here, with a peak-to-trough share price fall in October of a whacking 17pc that wiped out five months of gains. The question is whether Electrocomponents was overpriced or is now oversold.
It is a company with an eye for detail, selling everything from socket screws to ethernet switches and Raspberry Pi, a do-ityourself personal computer. Electrocomponents offers more than 500,000 industrial and electronic goods sourced from over 2,500 suppliers under brands including RS Components and Allied Electronics & Automation. This sort of business benefits from brisk economic activity, from fixing and investing. Recent global trade has been supportive, but its progress has involved self-help too. Ruth has been ruthless in sharpening profit margins. But rather than simply chopping costs – although £30m has been squeezed out with another £12m being pursued – he has driven sales too. The second quarter was the sixth in succession to register double-digit growth, the fruits of doing simple stuff better, such as improving customer service and selling more in each transaction. Emphasis is being placed on RS Pro, the company’s own brand. If it takes off in North America, where it was launched two years ago, it should boost margins in the region, which lag behind the wider group. Another opportunity to improve lies in Asia Pacific, where Electrocomponents has just moved into profit.
Overall, the £2.8bn-valued group is reporting operating margins of 10.4pc, comfortably above its 10-year average. It has a mid-teens target in its sights, just what it was making in the early 2000s. To do so it will have to brush up on its Net Promoter Score, which drives much web traffic.
In the last financial year, earnings per share jumped by 35pc on an underlying basis. That is unlikely to be replicated but analysts believe there is still good momentum. The team at Numis have a base case of 12pc annual growth up to 2025. However, it sees a plausible path to doubling earnings per share from their current levels. In the last year the broker has had to race to keep up with events, upgrading 2019 numbers by 33pc.
Another development to watch is the £88m acquisition in May of IESA, a procurement business that is expected to improve group earnings in the first full year of ownership.
Electrocomponents’ first deal for 18 years brought it a firm that manages the supply of maintenance and repair items for 80 major customers including Astrazeneca and Siemens. IESA employs staff on most client sites to process orders, store goods and simplify payments. By typically signing up to five-year contracts, the customers benefit from lower unit costs and Electrocomponents gets revenue visibility that its just-in-time model has not previously afforded. From largely UK operations, the IESA model can be exported. With net debt of just £65m it is no surprise that Ruth has flagged the possibility of further bolt-on deals in Germany and the United States.
Before the sell-off, analysts at Stifel had an 885p target price on Electrocomponents, based on a forward-earnings multiple of 25 times. That looked toppy, but the retreat means the stock is now trading on 18 times this year’s forecast and 16 times next year’s numbers. That might not be Amazon prices, but it is a good enough reason to buy.