Electrocomponents tumbles on troubling update

Shares in Electrocomponents (ECM) slumped to their lowest level since July 2013 following a disappointing trading update. The distributor of engineering products said its underlying sales growth was 3 per cent in its first financial quarter, which ended on 30 June. That was better than the 2 per cent it clocked in its last full year, but obviously not good enough to allay fears that all is not well.

There are two major concerns. First, margins are under pressure. Electrocomponents said that its gross margin had sagged by 0.8 percentage points year on year due to "mix effects" and price cutting.

Secondly, the home market continues to disappoint: UK sales were down 2 per cent over the three-month period. That's the same rate of decline as last year, even as improving UK manufacturing surveys suggest engineers should be buying more parts. The closely watched Markit/CIPS UK Manufacturing purchasing managers' index hit 57.5 in June - a seven-month high, implying rapid expansion. But Electrocomponents is not feeling it.

When we questioned management on this issue after the full-year results in May, they said peers also appeared to be seeing tough trading in the UK. It's true that close peer Premier Farnell's (PFL) recent UK performance has been pedestrian - but its domestic sales are at least broadly flat, rather than falling.

Canaccord Genuity says...

Buy. We are downgrading our estimates as a result of a lower gross margin and increased foreign exchange headwinds. This reduces our current and next year earnings estimates by 12 per cent. We now expect earnings per share of 14.8p this year (16.2p in 2013-14). We are maintaining our sales-per-day growth forecast of 4 per cent because, while the first-quarter growth rate was a little below our forecast annual rate, the exit rate for the quarter accelerated. Yet we see the dividend yield as supportive of the shares.

Credit Suisse says...

Underperform. Growth has remained sluggish in core markets, particularly in Europe and the UK, even in the context of improving macroeconomic indicators. Despite generally improving readings of economic activity in Europe and the UK - which together account for nearly two-thirds of group revenues - organic growth rates have failed to rebound meaningfully. The company does not screen attractively against other cyclical stocks within the business services sector. We see better opportunities to play a cyclical recovery, with greater potential for operational leverage, elsewhere.