We believe Marks Electrical (MRK:AIM) has the potential to grow earnings at an attractive rate over the next few years driven by geographical expansion and market share gains.

Although the shares have only been publicly traded since November 2021, the company has been honing its customer proposition for 35 years.

Founded by Mark Smithson in Leicester in 1987 at the tender age of 21 the company sells a huge range of premium branded products, from refrigerators, washers and dryers, dishwashers, audio-visual, small appliances, and add-on services through to sinks and taps.

Since 2018 the company’s sales have tripled to a record £98 million while operating profit has increased 12-fold to £5.7 million. Over the last three years its share of the online major domestic appliances market has more than doubled to 4.7% while its share of the online consumer electricals market has increased by a factor of six to 0.6%.

Interestingly, the gains have been made against a shrinking market impacted by the cost-of-living crisis which suggests the company’s customer proposition is attractive and resilient.

‘This further demonstrates the strength of our business model and the attractiveness and advantage of our market-leading customer offering, as more people continue to discover our brand
up and down the country,’ said Smithson at the 2023 results.

Brand awareness and customer satisfaction continue an upward trajectory with the former more than doubling from 6% to 15% according to YouGov data and the latter increasing to 4.8 from 4.7 based on Trustpilot scores (which rank from one to five, the higher the better).

The investment case is supported by strong conversion of profit into cash with the business converting 119% of operating profit into cash over the last two years to deliver a free cash flow margin against sales of 7.3%.

‘While the company is seeing some gross margin pressure, cost headwinds are easing from the highly inflationary environment over the last two years, which could result in operating leverage if trading strength continues,’ says Canaccord Genuity analyst Karl Burns.

Smithson believes the factors underpinning the company’s success – a combination of putting the customer first, hard work, getting the price right and honesty – are ‘difficult to replicate’ and give the business a sustainable competitive advantage.

Marks’ sales growth momentum has continued in the first four months of its 2024 financial year to the end of July with sales up 30.7% compared to a year ago.

The UK major domestic appliance market is worth around £4.2 billion in annual sales and consumer electronics is worth around £2.9 billion representing a big opportunity for Marks.

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