Gamble of the week: A cheap power cable maker

Some shares should come with their own health warning attached. I’m talking about firms where it’s difficult for an outsider, such as a private investor, to figure out what’s really going on. One such company is Volex, the world’s leading manufacturer of power cords for consumer electronics and computers. It also makes connection cables for telecom, medical and industrial firms.

A look back over the last decade or so shows its profits and share price are erratic. When things are going well, it makes lots of money and good returns for shareholders. But when business turns down things can turn ugly quite quickly.

Two profit warnings at the back end of 2012 have seen its profits and share price collapse. Management credibility is at a low ebb after the promised rebound in sales didn’t happen. This raises questions about whether they even know what’s going on. That said, with the shares at depressed levels, I think they could offer a profit-making opportunity.

Volex (LSE: VLX)

Volex share price

The company is doing what it can to slash costs. It has also been spending money to make its production processes more efficient. The trouble with slashing costs is that it only buys you time. When all possible costs have been cut it becomes very difficult to keep profits growing. Volex needs to sell more products – it needs more revenue. Where’s it going to come from?

Volex’s biggest customer is widely believed to be Apple. Volex has been a supplier of power cables for iPads and iPhones. This has been great business, as Apple’s sales have soared. But last year Apple changed the design for the chargers on its iPhone 5 and used a different one to Volex’s. With some commentators beginning to worry about Apple’s ability to keep growing, Volex shareholders are rightly nervous.

Yet, according to Volex’s management, the company has its biggest sales pipeline for more than four years. It is also bullish about opportunities in high-speed data connections with telecom companies. All it has to do now is turn the pipeline into sales and profits. This didn’t happen during the latter half of 2012 as consumer electronics and other customers scaled back in weak economies.

Volex’s shares look cheap and trade on just over six times next year’s profits. Buying now is a gamble because the company’s future sales are so uncertain. However, a cheap valuation and a profits recovery could see Volex’s shares go up a lot from here. They may also be cheap and distressed enough to invite a takeover bid.