Gamble of the week: A play for the nimble investor

This electronics maker is going through a rough patch, says Phil Oakley. But a swift-footed investor could turn a profit.

This company makes and sells electronic components. Its customers are concentrated in the transport, industrial, aerospace and medical sectors. A look at its five-year share price chart will frighten off many people.

If history is any guide, then this is not a share that you can even think about buying and holding forever it's simply far too volatile. But it could be one for the more nimble investor who can try to buy low and sell high.

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At the moment, it's going through a bit of a rough patch. It has a new chief executive at the helm who is trying to sort out a few problems he inherited. This is not proving to be easy.

Last month, TT Electronics (LSE: TTG)announced thatits big restructuring plan which involves shifting some of its production to Romania is not going to plan, and that the anticipated cost savings willtake a bit longer to show up in the income statement.

There's also been a change in the sales mix towards products with lower profit margins.As a result, profits in 2014 are going to be a little bit lower than the company had expected.That's not too bad in itself, but the expectation is that profits will also keep on falling in 2015.

It seems that there's been a few delays with customer orders too. House broker Numis expects earnings per share (EPS) to come in at 14p this year, compared with 15.8p in 2013, but is forecasting just 9p for 2015 before a recovery in 2016.

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So, at the moment, TT trades on just over seven times 2014 EPS, which looks attractive but this increases to 11 times 2015 EPS at a price of 98.75p. Which one do you base an investment decision on?


Perhaps the best way to look at this company is to look at it on the basis of its average EPS over the last ten years. This was the approach suggested for cyclical companies by legendary value investor Benjamin Graham.

On that basis, TT's ten-year average EPS is 9.54p, which would put it on a price/earnings ratio of 10.3 times.

This suggests that the current 6p dividend per share might be sustainable over an economic cycle although perhaps not in times of an extreme economic downturn.

However, if the company's fortunes can improve then the extreme pessimism baked into the share price may just prove to be an interesting buying point for the more adventurous investor.

Verdict: a risky buy



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