Electronics distributor Electrocomponents (LSE: ECM) has been one of the star performers of the FTSE 250 index over the past 12 months, with its shares doubling in value since October last year, and trading at their highest level for more than a decade. Investors will surely be wondering whether to take profits, or hang on and hope for further gains.
Heady valuation
The Oxford-based electronics firm certainly isn’t expecting a downturn anytime soon. Indeed, in a recent trading statement ahead of interim results next month, management says it now expects a big leap in pre-tax profits for the first half of its financial year, helped by a boost from the weaker pound. The company expects to achieve pre-tax profits of around £54m, compared to the £31.3m reported for the same period last year.
Management is projecting underlying sales growth of around 2% in the first half, with a stronger performance in the second quarter driven by a return to growth in North America and better trading trends in Asia Pacific. The company says both Northern and Southern Europe have continued to see good growth, which has helped offset some softness in Central Europe.
Brokers too seem optimistic about the firm’s prospects, with consensus estimates predicting a 27% rise in underlying profits this year, with a further 11% improvement in FY2018. However, the monumental share price surge over the past 12 months leaves Electrocomponents trading on a heady valuation of 23 times forward earnings. I feel the optimistic earnings outlook is more than baked into the price, leaving the shares exposed to a short-term sell-off.
Wait for it
Another mid-cap firm enjoying strong share price appreciation over the past 12 months is infrastructure products and galvanising services company Hill & Smith Holdings (LSE: HILS). The firm’s share price continues to reach new highs even after a fivefold increase in the last half-decade, supported by an upward earnings curve stretching back to the start of the millennium. But as we’ve seen with Electrocomponents, solid earnings growth can sometimes come with a hefty price tag.
Back in August, the Solihull-based engineering firm cranked out a gleaming set of interim results, with pre-tax profits beating analyst’s expectations for a 28% increase year-on-year to £31.7m and underlying revenue up 9% to £254m. Management expects the firm to continue to benefit from its strong position in its niche infrastructure markets, mainly in the UK and US, where high levels of investment are fuelling demand for its products.
Our friends in the City seem to echo management’s positive outlook, projecting a 21% rise in underlying profits for the full year to December, with another 8% improvement pencilled-in for 2017. At current levels Hill & Smith trades on a pricey 19 times forecast earnings for the current year, well above historical levels. I would suggest keen investors wait for the inevitable dip in the share price and buy on weakness to gain better value.