Share of the Week: Returning to dotcom boom levels

We don’t keep records of, nor do we hand out awards for, the number of times companies have been crowned as Interactive Investor’s Share of the Week. If we did, Electrocomponents (ECM) would probably win hands down.

The engineering service distributor peaked at an 850p high in the midst of the dotcom boom, but got caught up in the bust like many others, surviving but hitting a nadir of 113p in early 2009.

Since then, though, it’s been on a recovery mission. We first spotted the firm 18 months ago, early in current bullish trading channel at 273p. A full-year trading update had just sent shares 12% higher.

Five months later and a first-half update saw the stock surge 19% to 357p; a more spectacular re-rating was to come the following November with a 22% rise.

And it was at it again this week. A brief trading update ahead of half-year results on 14 November told us things were still going great guns. Revenue grew by double-digit percentages in every geography and division in the second quarter.

It follows an equally strong first-quarter and adds up to a stellar H1 2018, with revenue growth for H1 up 13%. “Strong execution and a positive market backdrop combined to drive faster revenue growth and market share gains across all five of our regions,” the company told us.

What’s more, gross margins are expected to tick up modestly for the first half compared to the previous year, with headline pre-tax profit set to be around £78 million, up 42% from H1 2017.

Not only that, but the share price has, once again, surged by double digits this week and is 10% up to another multi-year high 685p. Last time those levels were seen, Gordon Brown was around the time Gordon Brown was delivering his fourth Budget speech.

Can the run continue? Analysts certainly think so. Both Numis Securities and Liberum have been busy upgrading full-year forecasts, with earnings per share (EPS) increasing by 4-7% through 2018-2020.

Numis’s Julian Cater has also raised his target price by 7% to 705p, suggesting upside potential of 3% – modest but still enough to keep his ‘add’ recommendation.

Rahim Karim at Liberum reckons future M&A and innovation gives significant potential for even more value creation. Add to this strong free cash flow growth and his price target also increases, to 680p. While this suggested upside Tuesday, it’s looking a little fully valued right now.

Both brokers forecast EPS for 2018 of 26p. This gives a forward price/earnings (PE) ratio of 26 times, which looks pretty high. That said, if profits continue to grow at such pace, it could be a price worth paying. Don’t forget, ECM recently grew its dividend for the first time in five years, suggesting confidence in the outlook.

We wondered after an initial glance at the chart whether to cover it today, as it may have done enough already. Judging by the upward momentum, maybe not.

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.