PWR Holdings powers ahead with Shelby Mustang contract
It was a big weekend of motorsport. The first Formula One Grand Prix of the season took place in Melbourne.
Of the 20 cars that lined up on the grid, 18 use cooling systems supplied by Gold Coast company PWR Holdings. (The two that don't managed to finish first and second).
Prior to the main event the V8 Supercars also held round two of their season. Many of those cars are also using PWR cooling.
In addition to the V8s and F1, PWR also works with leading Nascar and Indycar teams, touring cars and rally teams all over the world. In the first half of the 2019 financial year revenue from Motorsports accounted for 61% of the total.
The remainder is made up of Automotive aftermarket products at 22%, original equipment manufacturer (OEM) 8% and emerging technologies 9%.
I previously wrote an article about PWR Holdings (ASX: PWH) about a year ago. Since that time, the share price has increased by 54% and a dividend yield of 3.4%, fully franked, has been received.
So what is driving this high-performance stock? Underlying profit after tax increased 30% in 2018 and is up 16% in the first half of 2019 compared with the prior corresponding period. Revenue is up 22% over this same period. There is also zero net debt.
Perhaps surprisingly for a family business started on the Gold Coast in 1987, the majority of revenue is now generated overseas.
Its biggest markets are the UK, followed by the USA, Italy and then Australia. It has recently landed an OEM deal in the US to supply the cooling systems for Ford's latest top of the line muscle car, the 2020 Ford Mustang Shelby GT500.
As motoring technology gets increasingly complex the need for more sophisticated cooling systems increases. PWR manages its products from research and development right through to production and sales which puts it in a strong position to fulfil customer needs and in turn increase its margins.
Earnings before interest, tax, depreciation and amortisation (EBITDA) margins increased from 18.8% to 20.3% in the first half.
A number of studies anticipate an improving outlook for automotive cooling systems as engines become more efficient and electrification increases.
PWR Holdings is also diversifying into cooling technologies for applications in broader industries including aerospace, storage batteries in the energy sector, high powered drones and electric cars.
Market analysts are forecasting revenue growth at PWR of 19%pa over the next two years and earnings per share growth of 17%. Return on equity is over 30%.
In recognition of the contribution, it is making to the Queensland economy through its manufacturing and exports PWE was awarded a Made in Queensland grant in February of $1.095 million.
This will facilitate the purchase of an advanced 3D CT scanner that will enable additional research and development and enhanced quality control.
PWR is a strong business, well managed, and a clear leader in its chosen niche. The balance sheet is conservative and the revenue and earnings are growing.
The remaining question is how much should you be prepared to pay for such a business? The forecast PE ratio is over 25, and the PE to growth (PEG) ratio is 1.6 (above 1 is normally considered expensive).
The dividend yield is 2.3%. All of these measures indicate that the stock is expensive at current levels.
Unless you anticipate that growth will exceed the levels forecast, it may be better to maintain a watchful eye to see if a price fall presents an opportunity.