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It has been a troublesome few years for FTSE 250 agency Victrex (LSE: VCT).
The polymers specialist has seen its share value fall by 27% in a single 12 months. Over 5 years, the decline has been 58%.
The factor is, I believe Victrex has rather a lot to love about it as a enterprise.
If that turns into clearer once more this 12 months, allaying some Metropolis fears about dangers the enterprise faces, I believe the FTSE 250 share may advantage the next value.
To start out, I’ll clarify what I like about Victrex (and why I’m a shareholder in it).
A Warren Buffett-like moat
The primary purpose I like Victrex is that it has the type of enterprise “moat” billionaire Warren Buffett typically enthuses about.
It makes excessive efficiency polymers which are utilized in all types of functions the place security is essential, from aerospace to vehicles. That implies that high quality is a paramount consideration for patrons, giving suppliers pricing energy.
On high of that, Victrex makes quite a few proprietary polymer merchandise that successfully imply it’s the solely selection for patrons with sure particular wants. Once more, that offers it pricing energy.
In flip, that has helped the corporate generate sizeable extra money to pay dividends. The present dividend yield is 5.8%.
An more and more powerful buying and selling surroundings
To date, so good.
For a very long time, that enterprise mannequin was akin to a license to print cash.
Victrex has had a tough few years which have referred to as into query whether or not it might maintain its previous success (and revenue margins). Publish-tax revenue final 12 months was 77% decrease than two years earlier than. Revenues in the identical interval slid by 12%.
As industrial functions evolve, a key threat dealing with Victrex – and it’s one I proceed to see – is whether or not demand for the kinds of polymers it makes will keep robust, or decline.
Indicators of a possible turnaround
So it’s comprehensible that buyers have been cheered by some components of the corporate’s full-year outcomes, printed final month. Sure, revenues earlier than tax have been down and pre-tax revenue was down badly.
However there was, a minimum of, quantity development.
Among the current earnings drops might be pinned on the startup prices of recent manufacturing services in China. Now they’re operational, hopefully they will flip from a loss centre to a revenue centre for the FTSE 250 agency (although one threat I see is mental property leakage).
What in regards to the quantity story?
Greater volumes however decrease revenues usually level to both a change within the mixture of merchandise bought, or declining pricing energy. The corporate pinned this on trade charges and weaker efficiency in its increased margin medical division, affecting its general gross sales combine.
So, if the product combine will get again to a extra regular one (with stronger contribution from medical merchandise) and volumes proceed to develop, 2025 may see each revenues and earnings develop at Victrex.
If that occurs, I believe it may very well be excellent news for the Victrex share value. Having taken some earnings following final month’s announcement, I proceed to carry my long-term Victrex stake for now.
