Electrocomponents: Decent Business, But Not Cheap (OTCMKTS:EENEF)

Electrocomponents (OTCPK:EENEF, OTCPK:EENEY) is a U.K.-listed electrical components supplier with global operations. I don’t think the shares currently offer good value, but the company is a strong operator in a fairly resilient area of demand, so is worth keeping an eye on in case of a more attractive entry point offering itself.

Electrocomponents: A Leading Global Supplier of Electrical Components

The company supplies electrical components to industrial companies and suppliers. Some of these are very simple – little bits of wire and such like. Others are more complex, including finished items like circuit boards. The company catalogue covers hundreds of thousands of items, so can help plug a gap in a supply chain at short need.

One of the good – and bad – things about this is that it is a fairly simple business model both to understand and, in theory, to offer. At a basic level, the company is a distributor, so needs expertise in sourcing, logistics, delivery, customer service and stock management. Around this, of course, there is a lot of talk about data, innovation and the other stock phrases of modern companies, but the nuts and bolts of the company are basically nuts and bolts. That helps investors assess its performance clearly.

Although the company is often talked about as a distributor, language it uses itself, it is in fact primarily a manufacturer. It owns a number of brands under which it markets its products – these are better known in the trade than they would be to a generalist investor.

Source: company website

Around two-thirds of revenue comes from Europe. The Americas make up a quarter, and the small residual amount comes from Asia Pacific and emerging markets.

COVID-19 has undoubtedly hit demand, and I expect a continued weakened economic environment to have a negative impact on demand too.

Source: Q1 company trading statement

Overall, however, I see some defensive qualities to the company’s sales. Electrical components are in demand broadly in line with the products in which they are used, and while some are discretionary, a lot of them in the company’s industrial markets are non-discretionary. So, while demand is down and may stay down for a while, I expect it to be weakened, rather than the bottom having fallen out of its market.

The Past Couple of Years Have Seen an Uptick in Business Results

Revenue has been growing but not at a great clip.

In the past several years, the company has boosted earnings.

Chart compiled by author using data from company annual reports

However, that hasn’t really impacted the share price, which is now trading in a similar range to 2017.

Source: Google Finance

Chart compiled by author using data from company annual reports

At the current share price of 689p, the 2019 dividend payout would equate to a 2.1% yield, which is fine but unexciting for a midcap company in a mature business.

The most recent dividend was suspended, with the company saying that it had decided it was prudent to defer the final dividend decision until there was greater visibility. At the half year, it plans to review making an additional interim dividend for 2020. So, the total 2020 dividend may equal or top that of the previous year, albeit the payout will be unevenly timed. In its annual report, the company said its five-year strategic plan had been updated for a “U” shaped recovery (which I regard as optimistic) in which one assumption was that the company would continue to pay dividends. That said, in its recent trading statement, the company reiterated that it “remain(s) highly focused on protecting profit and conserving cash” which raises a question about the dividends.

The company’s balance sheet looks sustainable. At the end of March, it had £154.8m of cash at bank and on hand, giving decent liquidity for now. A business like this with hundreds of thousands of products on hand obviously employs a lot of capital, so could presumably squeeze more cash if necessary by stretching its supply chains a little. I think the intangibles on the balance sheet are a little higher than necessary, but that has no impact on the company’s ability to fund operations.

Source: company annual report 2020

Conclusion: Decent Company with a Limited Short-Term Growth Story

I like the Electrocomponents business, and the management has been doing a decent job (especially, given the recent illness of the chief executive).

Earnings have improved in the past several years although they now seem to be plateauing again. Long term, the dividend growth has been modest. The question is whether will continue ticking over, accelerate or decrease.

The drivers for acceleration at this point look low, in the short to medium-term timeframe. I don’t think there will be a U-turn recovery, but even if there was, the company’s revenue growth wasn’t exceptional before the U dip started, so I don’t see why it would be after we come out of it. More likely, in line with the broad economic outlook for its customer base, there will be modest or no positive growth for the company over the next several years.

As a low-growth stock in distribution, I think the company’s current valuation at a P/E of 20 is rich enough for now, and while it may bounce around in its recent range up to about 750p, I see no short-term upside above that for Electrocomponents shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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