Blue chip: A positive reaction
The expansion of Electrocomponents' catalogue to 68,000 items has injected a spark into its price
Sunday 25 August 1996
Its catalogues, however, are nothing if not comprehensive, listing virtually every relevant product under the sun. The latest UK edition lists more than 68,000 engineering, electrical and electronic items, from instruments and semiconductors to plugs and power drills.
How the company does business has not changed much since it was founded in 1938, selling gramophone spares. It is this dedication to managing a simple business well that has seen the company consistently grow its profits over the years. Nevertheless, the apparent simplicity masks a fiercely complex operation. Its UK offices despatch 15,000 orders a day - at an average spend of pounds 80 each. "We supply the whole of British industry," says finance director Robert Tomkinson, "and to achieve that is less simple than the bare bones would suggest." Because it is in the business of small orders, it does not compete on price. Instead service, availability and speed of despatch are the hallmarks of its reputation.
Electrocomponents is a well-kept secret outside the City. "We purposely like to keep a low profile," says Mr Tomkinson.
However, its attractions have not gone unnoticed in the Square Mile, with the shares resting on a 40 per cent premium to the market. Judged as an investment, the company is anything but boring. Over the last 10 years, the dividend has increased at a compound rate of 15.5 per cent; earnings per share have risen 11.9 per cent, compound, with sales up 13.8 per cent.
Inevitably it is a track record that has seen the shares rise over the same period. But - as our chart shows - there has been a dip recently, even as the market has been hitting new highs. The shares are off from a high of 405p in May, and now stand at 378p. Is it just a summer cold, or does the decline signal genuine long-term fears?
At the time of the interim results in June, the company once again unveiled some sparkling figures. Sales were up 18.5 per cent to pounds 559.9m, while pre-tax profits clipped ahead to pounds 99.2m. However, the chairman Roy Cotterill revealed that the pace of growth had slipped from its highs of 1995. Mr Tomkinson concurs that the company is not immune from the business cycle. He adds that feedback from customers continues to suggest little sign of growth returning to 1995 levels.
There was concern at Mr Cotterill and Mr Tomkinson exercising share options recently. But the finance director says this was overdone, and was not based on any doubts the directors may have. Despite this, all signs point to a group firmly on course. And for consistent growth stocks such as Electrocomponents, there are always those who believe the shares deserve an even higher rating. James Heal and Robert Harris, of ABN-Amro Hoare Govett, say the group's expansion overseas - especially into Asia - leaves the shares undervalued by around 15 per cent. They estimate that Asia could account for up to 10 per cent of operating profits in 10 years' time.
After some misguided diversification in the late 1980s - since sold off - the group has refocused on old-fashioned organic growth. It has a three-pronged strategy.
One major avenue has been to increase the product range in its catalogues. For example, in the UK the range of 68,000 items has almost doubled from 35,000 three years ago. This has also embraced a move into entirely new product ranges, and away from its traditional electronic components. In the 1990s, it has added mechanical products. It claims to have built up a significant market share over traditional suppliers in this market.
To improve its service offering, it has opened more trade counters, and now has 28 around the world, and will guarantee to service the more sophisticated machines and instruments it sells. It has also launched its catalogue on CD-Roms. Given that the catalogue costs about pounds 15 a copy to produce, against pounds 2 per CD-Rom, it could have heralded a huge cost saving. But while engineers liked the CD, they also liked browsing through the paper version. As one said, you can't read a CD-Rom in your bedroom.
Electrocomponents has also redoubled its efforts to build new markets overseas. Catalogue selling is unique to the UK and the US, so it takes a while for the concept to become established abroad. But it now has operations in 14 countries, and has embarked on a programme of encouraging independent distributors to work with the company. It will agree to buy out the distributors' owners at some future date, giving it instant access to the region, through a business with whom it already enjoys a close relationship.
Capitalised at pounds 1.6bn, it is the biggest stock in its sector - distributors - and larger than Inchcape, recently deposed from the FT-SE 100. Share price gains over the last year have left it within spitting distance of FT-SE membership. But the company is unruffled at the prospect of finally hitting the big time. "It'll come when it comes," says Mr Tomkinson.
But on present trends, it is only a matter of time. The shares, despite a heady P/E rating of 24 times current earnings, look more realistically priced when 1996 results are factored in. And a yield of 2.2 per cent is about right for a stock with its characteristics. A convincing long- term buy.
Share price 383p
Prospective p/e 21.8*
Gross dividend yield 2.2%
Year to 31 Mar 1994 1995 1996 1997* 1998*
Turnover (pounds m) 396.5 472.6 559.9 651.6 747.9
Pre-tax profits (pounds m) 72.7 86.1 98.9 113 130
Earnings p/s 11.4p 13.7p 15.6p 17.9p 20.6p
Dividend p/s 4.75p 5.62p 6.6p 7.75p 9.0p
* ABN-Amro Hoare Govett forecasts
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