Image source: Getty Images
It has been a difficult few years for FTSE 250 firm victorex (LSE: APV).
The polymer specialist has seen its share price fall 27% in one year. In five years, the drop has been 58%.
The thing is, I think there's a lot to like about Victrex as a business.
If this becomes clear again this year, allaying some of the City's fears about the risks facing the business, I think the FTSE 250 share could deserve a higher price.
To start, I'll explain what I like about Victrex (and why I'm a shareholder).
A Warren Buffett-style moat
The main reason I like Victrex is that it has the type of business “pit”Billionaire Warren Buffett often enthuses.
It produces high-performance polymers that are used in all types of applications where safety is crucial, from aerospace to automobiles. That means quality is a primary consideration for customers, giving suppliers pricing power.
On top of that, Victrex manufactures a number of proprietary polymer products that effectively mean it is the only option for customers with certain specific needs. Again, that gives you pricing power.
In turn, that has helped the company generate considerable excess cash to pay dividends. The current dividend yield is 5.8%.
An increasingly difficult business environment
So far, so good.
For a long time, that business model was akin to a license to print money.
Victrex has been through a difficult few years that have called into question whether it can maintain its past success (and its profit margins). Profit after taxes last year was 77% lower than two years earlier. Revenue in the same period fell 12%.
As industrial applications evolve, a key risk Victrex faces – and it's one I continue to see – is whether demand for the types of polymers it makes will remain strong or decline.
Signs of a possible change of course
So it's understandable that investors were encouraged by some elements of the company's annual results, released last month. Yes, pre-tax income decreased and pre-tax profits decreased dramatically.
But at least there was growth in volume.
Some of the recent earnings declines can be attributed to the upfront costs of new manufacturing facilities in China. Now that they are operational, I hope they can move from a loss center to a profit center for the FTSE 250 company (although one risk I see is intellectual property leakage).
What about the history of the volume?
Higher volumes but lower revenues typically indicate a change in the mix of products sold or a decrease in pricing power. The company attributed this to foreign exchange rates and weaker performance in its higher-margin medical division, which affected its overall sales mix.
Therefore, if the product mix returns to a more normal state (with a larger contribution from medical products) and volumes continue to grow, 2025 could see both revenue and profit growth at Victrex.
If that happens, I think it could be good news for the Victrex share price. Having made some gains following last month's announcement, I continue to maintain my long-term stake in Victrex for now.
