Monday, 15 July 2013

Premier Farnell (PFL) ... Empirical regularity?

Monday 15th July

I am long Premier Farnell (PFL, mkt cap £813m) from 218p/shr for what I reckon could be a smash n’ grab. That is to say that at the outset I did not plan on holding for a prolonged period, just that I project an appealing pop higher in a short space of time. I expect PFL’s peer, Electrocomponents’ (ECM, mkt cap £1,103m) trading update this Wednesday to be the catalyst. Ex-post, I reserve the right to ride any bounce for longer than I’d planned.

What initially caught my eye was empirical regularity (ER). ER is not an iron law but it’s a hard trend to break. Historically, PFL’s share price (and ECM’s) has strongly correlated with that of the performance of the US Philadelphia Semiconductor Index (SOX Index).  According to Bloomberg, the US SOX is a “modified capitalisation-weighted index, comprised of companies that are involved in the design, distribution, manufacture, and sale of semiconductors.” As PFL and ECM distribute electronic components, it's hardly surprising that over the course of many years, their share prices have correlated well with this index. However, more recently this trend has faltered somewhat. I am predicting that ER resumes. 

On a currency-adjusted basis, PFL has significantly underperformed the SOX during the past 12 months. The last periods of significant under-performance were in 2005 and 2011, when PFL rallied from the 160s to the 210s and from the 180s to the 220s, respectively. Given where the US SOX is currently at, and the empirical regularity with which it has led the component distributors, I reckon PFL should be closer to 300p/shr and not 220p/shr (36% upside). As such there’s probably a decent safety margin on being long PFL.

Further encouragement is forthcoming from the boffins at the Semiconductor Industry Association (SIA). The SIA report that semiconductor billings jumped 4.6% higher during May 2013. That was the largest sequential monthly increase in sales for the industry in over 3 years. Three-month-moving average sales were 6.3% higher so it wasn't a flash in the pan. Moreover, the Global manufacturing PMIs have also been on an improving trend over recent months.

Electrocomponents reports its 1Q14 trading update this Wednesday 17th July. Comps are relatively undemanding with 0% organic growth achieved in 1Q14, so there is likely some scope for a positive update and read across to PFL.

On a valuation basis, PFL trades at 12x next year’s earnings (Bloomberg consensus). That doesn’t appear expensive when considering that EPS growth is projected to be well into double digits over the forecast horizon. PFL also yields 5% on the dividend.

And another thing ...
I could always have just bought ECM instead. But it’s the chart of PFL which also appeals to the gambler in me. As far as my amateur charting skills can infer, PFL appears to be on the verge of a bull flag breakout.

Empirical regularity; strengthening markets; operational gearing; appealing valuation; attractive dividend; bull flag breakout opp ... Phwoar!!!  I’ve bought a fair few. 

Premier Farnell (PFL) share price vs. US Philadelphia Semiconductor Index (SOX)
Source: Bloomberg
Global manufacturing surveys
Source: Bloomberg
PFL share price - potential bull flag breakout?
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

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