Investment Column: Mixed fortunes in electronics

COMPARED TO Premier Farnell, Electrocomponents has had a quiet year. While the rival electronic parts distributor issued several profit warnings and waved good-bye to its chief executive, Electrocomponents has quietly gone about its business. The two companies' contrasting fortunes has been reflected in their relative share prices: Premier Farnell shares have lost a fifth of their value in the past year while Electrocomponents rose by 42 per cent.

Nevertheless, the business is not without its problems. In the UK, where Electrocomponents still makes three quarters of its sales, comparable turnover last year was up 5 per cent. Even though margins widened, profit growth only just made it into double figures. This from a company that in the past regularly posted earnings growth of 20 per cent or more.

Electrocomponents' response has been to beef up its operations in continental Europe and, more recently, Japan. On the continent, investment is paying off even though the strong pound dented the value of profits in sterling terms. But expanding in Japan will wipe pounds 30m off Electrocomponents' profits over the next five years.

This investment, and the cash Electrocomponents is pouring into its web site to allow customers to order electronically, make long-term sense but at the expense of medium-term growth. Merrill Lynch, the stockbroker, forecasts profits of pounds 128m in 1999 and reckons it will be three years before the company returns to double-digit earnings growth. On a forward PE ratio of 28 the shares, up 6.5p to 569.5p yesterday, are high enough.

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