Blue chip: A positive reaction

The expansion of Electrocomponents' catalogue to 68,000 items has injected a spark into its price

Unless you happen to be an electronics hobbyist, Electrocomponents, an electrical and electronic parts distributor which sells through catalogues, may not sound the sort of business to set the pulse racing.

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.

Electrocomponents

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

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping the First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week