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.
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.
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 |
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