Electrocomponents/Premier Farnell - soggy chips

Electrocomponents/Premier Farnell: There are differences between these two component distributors, but the market views them generally as non-identical twins. Frustrating ones at that. They long ago both grasped that paper catalogues were in decline and have switched to the internet, as well as becoming more international. Yet, despite the all-pervasive growth of electronic gadgetry these two stocks have become stock market plodders. Partly this is due to poor economic conditions since 2008, but there is still something missing. Electrocomponents interims to 30^th September show sales up 2.8%, with the UK down 2% and international up 5%. However, pre-tax profits were down 16.1% on a margin squeeze, caused by price discounting and mix effects. At the earnings line eps took a similar hit being down 15.3% at 6.1p. Free cash flow also took a thump being down 31.7% to £24.6m, although the balance sheet remained strong with net debt to EBITDA at 1.2x. The dividend was maintained at 5p, but thinly covered at 1.2x. Longer term the dividend policy is to be progressive, whilst growing cover towards 2x. So any earnings growth will not be fully reflected in the dividend for quite some time to come.

They flag that the second half has got off to a slow start. The CEO Ian Mason has announced that he is leaving after a long stint. Whilst being well regarded, his tenure has never quite delivered on the initial optimism. I would like to be enthusiastic about the shares but I can’t, with the shares stretching to reach 14p of eps for a PE to March 2015 of 14.4x at a soggy 201p although a maintained11.75p total dividend is a 5.8% yield.

In Premier Farnell’s IMS, a similar tale was told. Quarterly sales were up 2.7%, with the gross margin down 0.5 percentage points. Their guidance reflects tougher conditions and is now that “full year operating margin [will be] slightly below prior year levels”. Premier Farnell has a January year end and maybe 14.0p of eps for FY 2015 is a PE of 11.6x at 162p, with a yield, assuming a maintained dividend of 10.4p, of 6.4%. So Premier looks cheaper than Electros, but neither seem to be in their stride and dividend growth is elusive. They are ones to watch for macro-economic or self-help improvement, but with little rush to invest just now. (Neil Cumming^, 17^th November 2014)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk