A company is clearly doing something right when financial guidance and market forecasts are consistently going up in this environment. Yet shares in electronics engineer DiscoverIE (DSCV) have lost more than 30% this year and are nearly 42% down on their £12.62 highs of September 2021.

This is a great time to buy the shares for the medium to longer-term, we believe, with analysts overwhelmingly positive. Top-end price predictions call for up to 65% upside, and even the average of analyst price targets imply gains of 36% are up for grabs.

Longer-run Shares readers will know DiscoverIE; we have followed its strategy of climbing the value supplier chain for several years, flagging its early steps at 406p almost three-and a-half years ago.

This used to be a fairly simple distributor of parts and components to the electronics manufacturing industry, but it has cleverly shifted to become a business critical provider of often unique custom designs to highly regulated industries where corners simply cannot be cut.

These include areas like medical, aerospace, transport, and renewables. These are sectors where equipment needs to be high-performance, reliable, efficient and regulations compliant, and that means fatter profit margins.

In 2021 the company reported 37.4% gross margins (high for a manufacturer) and 14.2% at an operating level.

This ambitious adventure is far from over, in our opinion, a view backed up by hard facts and impressive trading figures. A brief trading update on 28 July underscored optimism, showing that the strong growth seen through its 2022 financial year (to 31 March) has continued into this year’s first quarter, with no hint of slowing in the second quarter. First quarter organic growth was 17%.

The news saw analysts nudge forecasts higher again, having modestly raised estimates earlier in the summer, and in February. This implies around 35p of earnings per share in the year to March 2024, putting the stock on a price to earnings multiple of about 21.

Recession risks remain and further falls in economic activity could slow progress. That said, further value-adding bolt-on acquisitions, such as custom components maker CDT last month, could easily accelerate growth far beyond management’s 10% a year organic target.

With free cash flow of £25 million to £30 million forecast, and net debt running at just 8% of equity, DiscoverIE has plenty of balance sheet power to leverage to fuel new growth opportunities in future. 

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