Red hot consumer electronic gadgets, such as mobiles and tablets, often have product life cycles as short as 12 to 18 months. But in the industrial arena, sophisticated medical, factory and telecommunications equipment generally lasts for five to seven years. So, as a parts supplier, earnings are steady and reliable. This is where XP Power steps in.
The firm is a leading developer of power control components (priced between $30 and $150) to the industrial (45% of sales), healthcare (26%) and technology (29%) sectors. Its products are commonly used in devices that users have to be certain that they can rely on, such as medical ventilators, hospital beds, surgical robots, and traffic lights.
The business was originally floated in 2000 as a specialist distributor. Over the past 12 years, though, it has shifted up the value chain by investing in research and development, and by establishing low-cost manufacturing in China and more recently Vietnam.
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This strategy has paid off. Sixty per cent of revenues are now derived from items based on XP's own intellectual property, which not only generates higher margins, but also allows it to tailor solutions to a client's specific requirements. All told, the group has over 5,000 active customers, such as ABB, General Dynamics, GE, Siemens, Intel, Phillips and J&J. The largest accounts for less than 5% of sales, so the firm is well diversified.
There has been a pullback recently as customers have reined in spending. However, orders improved in the first-quarter, and there should be flattish growth in 2012. Demand should be driven by the expansion of hospital automation, greater environmental legislation, tighter regulatory testing and the need for improved power efficiency.
XP Power (LSE: XPP), rated a BUY by Westhouse Securities
The City expects 2012 revenues and adjusted earnings per share (EPS) to come in at £101m and 98.3p respectively. That rises to £109m and 112.5p in 2013. This puts the shares on a price/earnings (p/e) ratio of 12, with a 3.8% dividend yield. I would rate the firm on a 12 times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for the £18m of net debt and £4m in future contingent consideration, delivers an intrinsic value of about £14 per share.
XP is exposed to wage inflation in China, along with a rising US dollar, the currency in which it sources most of its goods. Demand could also be affected by cut-throat competition and a global double-dip recession, should it materialise. But the board does not seem worried. Two directors splashed out £177,000 on the stock in April. Westhouse Securities has a price target of £14.50, with the next trading update due on 9 July.
Rating: BUY at £11.75
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.
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