It hasn’t been a great year for investors in Premier Farnell (LSE PFL), with shares in the company falling by 15% since the turn of the year. This does not compare well with the FTSE 100’s 0.5% gain over the same time period.
But, looking ahead, Premier Farnell could become one of your star performers. Furthermore, its share price could double. Here’s how…
Upbeat Results
Today’s results from Premier Farnell were upbeat and showed that the company is making good progress. For example, sales growth of 4.7% was reported in the first half of the year, with the company’s operating margin remaining constant and in-line with expectations.
Furthermore, the reorganisation of the business is well on-track and is expected to save the company between £6 million and £8 million per year, all of which have meant that adjusted profit increased by 2.4% despite currency headwinds.
Looking Ahead
In terms of future potential, Premier Farnell appears to be on the brink of a purple patch. That’s because, while earnings growth in the current year is set to be rather pedestrian at 4%, next year is expected to show a much stronger performance from the company. Indeed, earnings per share (EPS) is forecast to grow by 16% in the next financial year, which is roughly twice the expected growth rate of the wider market.
With Premier Farnell trading on a price to earnings (P/E) ratio of just 12.4, this equates to a very attractive price to earnings growth (PEG) ratio of just 0.7. This highlights that growth is on offer at a very reasonable price.
Valuation
Despite having a very comfortable dividend payout ratio of 72%, Premier Farnell currently yields a whopping 5.8%. This appears to be rather high given the company’s strong performance, very bright prospects and attractive valuation. As a result, it would be of little surprise to see Premier Farnell’s share price bid up by investors who are seeking a combination of income, growth and great value.
With the FTSE 100 currently yielding 3.3% and Premier Farnell set to deliver strong performance, it’s feasible that the latter’s yield could be pushed as low as that of the wider index. After all, Premier Farnell is due to increase earnings at twice the rate of the wider index next year.
Were this to happen, it could mean that shares in Premier Farnell trade at a price of 373p. That’s just over twice the current share price of 184p and would not require a jump in dividends, but merely for the current dividend payout ratio to be maintained.