Is Analysts’ Sentiment For Victrex plc’s (LON:VCT) Justified?

There’s no stopping the Victrex plc (LSE:VCT) growth train, with analysts forecasting high top-line growth in the near future. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

First, a short introduction to the company is in order. Victrex plc, through its subsidiaries, manufactures and sells polymers worldwide. Started in 1993, it operates in United Kingdom and is recently valued at UK£2.13B.

LSE:VCT Future Profit Mar 29th 18
LSE:VCT Future Profit Mar 29th 18

The company is growing incredibly fast, with a year-on-year revenue growth of 15.02% over the past financial year , and a net income growth of 20.61%. Over the past five years, sales has grown 4.57%, boosted by previous years of higher capital expenditure, which most recently reached UK£16.70M. VCT has been reinvesting more into the business, leading to expected return on investment of 23.94% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to increase to UK£112.37M in the upcoming year, exceeding the industry average growth rate of 9.32%. Furthermore, over the next five years, earnings are expected to grow at an annual rate of 3.94% on average. These figures illustrate VCT’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.

LSE:VCT Historical Debt Mar 29th 18
LSE:VCT Historical Debt Mar 29th 18

VCT’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. With zero-debt on its balance sheet, VCT doesn’t have to worry about maintaining a high level of cash to meet debt obligations and paying near-term interest costs. These constraints can be a burden for growing companies as it prevents them from reinvesting cash from operations back into the business to fuel further growth. The value of financial flexibility may outweigh the benefit of lower cost of capital for VCT, which debt funding usually provides compared to issuing new equity. However, the company has plenty of headroom for borrowing, and the expected growth, to have debt funding as an option in the future. VCT has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. VCT has managed its cash well at a current level of UK£120.10M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

The current share price for VCT is UK£25.36. With 85.79 million shares, that’s a UK£2.13B market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 4.76% (source: analyst consensus). With an upcoming 2018 free cash flow figure of UK£101.48M, the target price for VCT is UK£18.69. This means the stock is currently trading at a massive premium of 35.71%. But, comparing VCT’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 21.79x vs. the industry average of 21.94x.

VCT has a strong investment case. The stock is appealing because of its strong fundamentals – financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.