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It’s been a tough few years FTSE 250 it is strong Victrex (LSE: VCT).
The polymers specialist has seen its share price fall by 27% in one year. In five years, the decline was 58%.
The thing is, I think Victrex has a lot to like as a business.
If that becomes clear again this year, allaying some of the City’s fears about the risks the business faces, I think the FTSE 250 share could be worth a higher price.
To begin, I will explain what I like about Victrex (and why I am a shareholder).
A moat like Warren Buffett
The main reason I like Victrex is that it has a business model”the canal” billionaire Warren Buffett often admires.
It makes high-performance polymers that are used in all kinds of applications where safety is paramount, from aerospace to automobiles. That means quality is the most important consideration for customers, which gives suppliers pricing power.
In addition, Victrex manufactures a number of proprietary polymer products which mean they are the only option for customers with very specific needs. Again, that gives it pricing power.
In turn, that helped the company generate excess cash to pay dividends. paid a dividend of 5.8 %.
The trading environment is getting tougher
So far, so good.
For a long time, that business model was like a license to print money.
Victrex has had a tough few years that have questioned whether it can maintain its previous success (and profit margins). Profit after tax last year was 77% lower than two years earlier. Revenue in the same period fell by 12%.
As industrial applications change, the main risk facing Victrex – and one that I continue to see – is that demand for the types of polymers we make will remain strong, or decline.
Signs of potential change
So it’s understandable that investors were excited by some aspects of the company’s full-year results, published last month. Yes, pre-tax income is down and pre-tax profit is down badly.
But there was, at least, an increase in volume.
Some of the decline in revenue can be attributed to the start-up costs of new manufacturing facilities in China. Now they are operational, hopefully they can move from a loss center to a profit center for an FTSE 250 firm (although one risk I see is intellectual property leakage).
What about the volume issue?
High volumes but low revenue usually indicate a change in the mix of products sold, or a decline in pricing power. The company pinned this on exchange rates and weak performance in its high-end medical division, which affected its overall sales mix.
Therefore, if the product mix returns to normal (with a strong contribution from medical products) and prices continue to grow, 2025 could see both revenue and profit growing at Victrex.
If that happens, I think it would be good news for Victrex’s share price. Having made some gains after last month’s announcement, I continue to hold my long-term stake in Victrex for now.
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