Contrary to the doom and gloom, the American third-quarter reporting season was largely a cheery affair. Earnings per share for the S&P 500 soared on average by 17% year-on-year, driven by a 10% leap in the top line. This says to me that, if we can avoid a meltdown in Europe, stocks are cheap, trading on tempting 2012 p/e ratios of less than 12.
Take Acal, the pan-European distributor of niche electronic (82% of sales) and IT components. During the 2008/9 credit crunch, it was hit hard by a combination of savage destocking and a strengthening dollar, which ramped up import costs. Since then, under the astute tutelage of chief executive Nick Jefferies, Acal has transformed itself by slashing overheads, streamlining operations and investing in its higher-margin electronics franchise.
As a result, the firm has moved back into the black, focused more on differentiated areas and executed a series of smart acquisitions of specialist suppliers. The last one was concluded in October, when Acal purchased MTC, a German-based electromagnetic shielding group, for €3.4m. The deal should be immediately earnings-enhancing. At the same time, Jefferies confirmed that trading was on track to meet expectations, and that he expected “increased profitability in the first half year”.
Acal (LSE: ACL)
Broker Oriel Securities is predicting turnover and underlying earnings per share (EPS) of £290m and 23.5p respectively for the year ending March 2012 – rising to £310m and 31p 12 months later. I rate the stock on a nine times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for pro forma net cash of £3.7m and a £5.5m pension deficit, that generates a fair value of about £2.75 a share.
Of course, there are risks. A key one is maintaining the company’s strong momentum amid the more austere economic conditions, including the threat of price deflation, in southern Europe. That geographic area contributes 28% to Acal’s group revenues. The firm must also deal with increasing competition and foreign-exchange fluctuations.
All the same, with a solid balance sheet, a decent dividend yield at 3.6% and years of experience negotiating downturns, Acal is a sound play for the more adventurous. Interims are due out on 28 November.
Rating: SPECULATIVE BUY at 210p (market capitalisation £61m)