With Christmas fast approaching, many industry pundits are talking down prospects for retailers as higher interest rates start to bite and cut into consumer spending.But there are two types of present that I believe will be near the top of many Christmas lists: residential and in-car entertainment systems. For example, it’s now nearly impossible to buy a Nintendo Wii console in the shops, while new Sat-Nav systems, the iPhone and the latest HD-ready TVs are also proving popular. Furthermore, in 2003, 25% of the manufacturing cost of a typical car was down to electronics. By 2010 this is expected to rise to 40%. So how can we make money from this trend towards more powerful, cheaper, wireless gadgets?
Armour Group (Aim:AMR)
With sales of £57.4m, Armour is the UK’s leading consumer electronics group focusing on in-car communications (30% of sales) and home entertainment (70%). Its core products are affordable high-quality in-car audio/video systems, specialist connectivity devices, GSM/GPS antennae and multi-room entertainment systems with associated furniture. New products being launched include bluetooth headsets for the new iPhone and an electronic car diagnostic kit.
It supplies leading retailers including Comet, Argos, John Lewis, Tesco, and Halfords. It is also achieving success with its strategy of teaming up with house builders (including Taylor Wimpey and Barratt Homes) and car retailers to offer its products as extras during initial purchase. Encouragingly, even in this more challenging climate, like-for-like revenues are still expected to grow by more than 10% this year.
So far so good, but what are the potential pitfalls? The main concern is if consumers decide drastically to rein in spending. But the new fiscal year has started well and many of Armour’s products are now considered essentials, rather than discretionary items. Indeed, the City expects sales and underlying earnings per share to rise to £61.8m and 5.1p for the year ending August 2008.
Another risk is the high level of debt, which after final deferred consideration payments, is expected to be around £6.2m by next August. Yet trading on an attractive 2007/2008 p/e ratio of less than eight, I rate the shares a buy for the higher-risk investor.
Recommendation: SPECULATIVE BUY at 35.25p (market capitalisation £24.1m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments