Prior to the arrival of the pandemic, TT Electronics (LSE: TTG) appeared to be in a positive trend with earnings, cash flow and shareholder dividends rising each year.
Why I think this is one of the best shares to buy now
The company earns its living as a global provider of engineered electronics for performance-critical applications. And the directors reckon the business benefits from “enduring megatrends” in high-growth markets such as healthcare, aerospace, defence, electrification and automation.
From day to day, TT Electronics designs and makes things such as sensors, connectors, hybrid microcircuits, power modules and sensors. And it does so from its facilities in the UK, North America, Sweden and Asia. On paper, the business is just the sort of thing I like to invest in. The set-up seems relevant in today’s world and it’s easy for me to imagine the enterprise growing over time as I hold the shares.
Another thing I like is the small market capitalisation near £375m. The company resides in the FTSE Small Cap index, suggesting there’s plenty of room for the business to grow. However, a glance at the 20-year share price chart shows me the stock has essentially moved sideways this century. TT Electronics may be a small-cap, but it’s been little for a long time. And the undulating chart is a testament to the long-term volatility in the record of earnings.
Right now, the company looks and sounds like a business recovering from the pandemic with tempting growth prospects ahead. But I suspect there’s a lot of cyclicality in the enterprise that could go on to unhinge a long-term investment in the stock. Nevertheless, I remain interested and consider it to be worth my further research time.
A positive outlook
Today’s full-year results report shows the damage caused by Covid. Constant currency revenue slipped by 9% in 2020 compared to the prior year and adjusted earnings per share plunged by 34%. But the directors reckon recovery is “well underway” and there was an increasing intake of orders and improved production capacity in the fourth quarter. Â
Free cash flow was “strong” through the period and the directors have restored the shareholder dividend, “reflecting good recovery and a positive outlook.” Looking ahead, chief executive Richard Tyson reckons the positive structural trends in the company’s markets will likely accelerate. He thinks the longer-term effects of the pandemic could cause that situation. So the directors’ outlook statement is positive in both the short and long terms.
But there’s still much that could go wrong for new shareholders from today. One risk is that a downturn in the industry could pull the rug from anticipated earnings. City analysts expect a robust double-digit rebound in earnings during 2021. But progress beyond the current year is uncertain.
Meanwhile, the stock isn’t particularly cheap. The forward-looking earnings multiple for the current year is running just above 14. And the anticipated dividend yield is around 2.9%. I’m late to the opportunity. It would have been better to have bought some of the shares just under a year ago when they crashed. Nevertheless, I’m tempted to pick up a few now to hold for the long haul while being mindful of the risks in the post-lockdown world.