Power products maker Volex (LSE: VLX) has made great progress since I last wrote about the firm two years ago. Back then, I saw a long-floundering business turning itself around. The share price was near 102p.
Since then, the company has been posting some impressive double-digit percentage annual increases in earnings. And City analysts expect further progress ahead. The market has been paying attention and the share price is near 364p today.
Volex has emerged as a focused business
Despite the good performance of the stock, my opinion two years ago was a little off-key. I thought the valuation looked undemanding with a forward-looking earnings multiple of almost nine. However, I also said: “I don’t believe we’re likely to see a valuation up-rating. The low-margin, cyclical nature of the business demands a modest rating.”
But I hadn’t appreciated the full extent of the reshaping of the business under its management team installed around 2015. And the company sold the Volex accessories division 30 years ago. All those sockets and switches being turned out bearing the Volex name have nothing to do with Volex plc anymore.
These days, Volex describes itself as “a leading integrated manufacturing specialist for performance-critical applications and power products.” And a valuation rerating has occurred. Now the forward-looking earnings multiple for the trading year to March 2022 is just below 20. And City analysts expect earnings to increase around 17%.
Volex has emerged as a growth business with one foot in the market serving the expanding electric vehicle sector. But is the share still buyable now? The full-year results report released today sheds more light on the investment proposition. The figures are good. In the 12 months to 4 April, revenue rose by just over 13% compared to the previous year. And underlying profit before tax increased by almost 37%.
Acquisitive and organic progress
Part of the growth strategy involves acquisitions alongside organic progress. For example, the company completed the acquisition of De-Ka Elektroteknik Sanayi ve Ticaret Anonim Sirketi in February. The Volex directors reckon the Turkey-based business has helped them “create the only truly global power cord manufacturer.”
Meanwhile, revenue from the firm’s electric vehicle (EV) customers increased by 193% in the period. That’s an impressive increase from an exciting sector. But revenue to EV customers came in at just under 12% of the total. In other divisions, Consumer Electricals grew by 5%, Medical declined by 3% and Complex Industrial Technology grew its revenue by 13%.
Looking ahead, the outlook’s positive. But Volex is a more expensive stock than it was. So support for the valuation relies on ongoing progress with earnings. And there’s always a risk that earnings could stall leading to a falling share price.
I’m a little cautious. Nevertheless, I’m still tempted to buy a few shares on dips and down-days to hold as the long-term growth story unfolds.