The British manufacturing specialist Volex’s (VLX:LON) share price has fallen recently. Currently, it’s hovering around the 300p mark – about 20% below its 2024 highs. So, why has the popular AIM stock dropped? And more importantly, is the current share price a bargain?
What does Volex do?
Before we dig into the share price action here, let’s first look at what this small-cap company does.
Volex is a manufacturer for performance-critical applications and power products. Today, it has 28 manufacturing locations with a global workforce of over 14,000 employees across 25 countries.
Volex is focused on five main markets:
- Consumer Electricals
- Complex Industrial Technology
- Electric Vehicles (EVs)
- Medical
- Off-Highway
While all of these markets offer the potential for growth, it’s the Complex Industrial Technology and EV segments that have the most potential, in my view.
Within the Complex Industrial Technology segment, Volex manufactures data centre products such as high-speed data cables and harness assemblies. Meanwhile, within the EV segment, the company makes charger products.
Between now and 2030, the global data centre market is projected to grow by around 10% per year while the EV market is forecast to grow by around 8% per year. This industry growth should provide strong tailwinds for Volex.
It’s worth pointing out that Volex likes to acquire other manufacturing companies. In recent years, it has made multiple acquisitions and this has boosted its top line substantially (revenues have nearly tripled over the last five years), but it has also increased its debt.
Why the share price has fallen
Now, on 15 November, Volex posted its half-year report and its share price fell by more than 10%. The results weren’t bad. For the period, revenue was up 30.4% year on year to $518.2 million while underlying profit before tax was up 11.6% to $37.5 million.
There were a few negatives in the report though. For a start, earnings per share (EPS) only rose by 2% to 15.2 cents. Secondly, net debt climbed to $204.5 million from $173.7 million a year earlier.
I don’t think these negatives were what caused the share price to drop, however. I believe that the share price weakness was down to a separate announcement on 15 November that the company had recently made multiple bids for LSE-listed manufacturer TT Electronics.
TT Electronics has not been performing well recently (it released a profit warning in September) so a potential acquisition may have raised some eyebrows. The price Volex was willing to pay (around £250 million) may have also spooked investors as this was well above TT’s market cap at the time, and it would have led to more debt on the balance sheet for Volex.
In the end, TT Electronics was not interested in Volex’s offers. So, it doesn’t look like a deal will happen here.
Is Volex a good stock to buy now?
As for whether the shares offer value today, I believe they do. For the current financial year ending 31 March 2025, analysts expect the company to generate EPS of 33.2 cents.
At today’s share price and GBP/USD exchange rate, that puts the stock on a price-to-earnings (P/E) ratio of just 11.3. Given Volex’s track record of success and future growth prospects, that seems very reasonable.
It’s worth noting that the average analyst price target right now is 417p. That’s about 40% above the current share price.
Looking beyond the low valuation, one other big plus is the fact that Executive Chairman Nat Rothschild owns 26% of the company. This means that management’s interests are aligned with those of investors.
In terms of risks, there are a few worth highlighting. One is a slowdown in one or more of its key markets. This scenario could derail the growth story.
Another risk is interest rates. If rates rise again, Volex’s profits could take a hit due to the substantial pile of debt on its balance sheet.
Acquisition risk should also be considered. Looking ahead, Volex could pay too much for a company, or struggle to integrate an acquisition effectively.
All things considered, however, I like the risk/reward setup at today’s share price. I believe the stock has the potential to generate attractive returns in the years ahead.
Disclaimer: Edward Sheldon owns shares in Volex
Based in London, Edward is a distinguished investment writer with an extensive client portfolio comprising a diverse array of prominent financial services firms across the globe. With over 15 years of hands-on experience in private wealth management and institutional asset management, both in the UK and Australia, he possesses a profound understanding of the finance industry.
Before establishing himself as a writer, Edward earned a Commerce degree from the prestigious University of Melbourne. Complementing his academic background, he holds the esteemed Investment Management Certificate (IMC) and is a proud holder of the Chartered Financial Analyst (CFA) qualification.
Widely recognized as a sought-after investment expert, Edward’s insightful perspectives and analyses have been featured on sites such as BlackRock, Credit Suisse, WisdomTree, Motley Fool, eToro, and CMC Markets, among others.
You can contact Ed at edward@goodmoneyguide.com
