SMALL CHAPTER IDEA: Britain still has thriving pockets of manufacturing excellence

Britain is no longer the industrial powerhouse it once was, having ceded its dominance in the manufacturing sector to the United States, Germany, Japan and, more recently, India, China and Taiwan.

Instead, it has relied heavily on the development of a service-based economy. However, there are pockets of manufacturing excellence that continue to thrive and innovate, largely unnoticed by the broader market.

While aerospace and defense giants like Rolls-Royce and BAE Systems capture much of the attention, other sectors are quietly fostering a world-class experience.

Companies like landfill grouppump specialists and IMIthe industrial engineering company, represent stalwarts of British industrial ingenuity.

Beneath these larger entities lies a group of smaller but equally impressive companies that have honed their operations to excel in highly specialized, profitable niches.

Up and coming

Among them are Spirax-Sarco, spectrumsand Rotorkcompanies that have consistently delivered value to shareholders through strong, niche-driven business models.

You could also add to the list. discoverIE Group, international designer and manufacturer of customized electronic components for industrial use.

It supplies sensors, magnetic devices, controls and connection equipment to a blue-chip customer base that includes global industrial titans such as ABB, Abbott and Vestas.

Under the leadership of CEO Nick Jefferies, discoverIE has expanded both organically and through a series of well-executed acquisitions. This strategy has allowed the company to outperform GDP growth throughout the economic cycle.

Central to its focus has been improving operating margins, largely through value-enhancing deals. According to the company’s latest figures, its operating margins have expanded 8.2 percentage points between 2015 and 2024.

By the end of the current financial year, margins are expected to reach 13.5 per cent, with an ambitious target of 15 per cent later.

DiscoverIE Group is an international designer and manufacturer of custom electronic components for industrial use.

Duplicating

This financial discipline, combined with consistent growth, has helped see IE doubling its earnings per share every five years, securing its place as a fixture in the FTSE 250.

At a recent capital markets day, CEO Jefferies laid out plans to step up innovation, accelerate its acquisition strategy and tap into new international markets.

The presentation was welcomed by analysts and investors, although the company’s share price, which is down 18 percent over the year, suggests the market remains cautious.

This decline may reflect broader concerns affecting manufacturers across all sectors, namely the issue of stock reduction.

In simple terms, stocking out occurs when customers postpone placing new orders while they review their existing inventory, usually in an attempt to manage working capital.

This phenomenon often disrupts sales, as demand appears to temporarily weaken.

Reducing stock reduction pressure

Last Tuesday’s trading update from discoverIE suggested that destocking pressures were beginning to ease, although not entirely.

“Order levels have stabilized and design advancements, a key forward-looking barometer, have increased significantly,” the company said, indicating early signs of recovery.

Although sales were down 4 percent compared to the same period last year, the decline slowed toward the end of the quarter.

The statement also brought positive news on the acquisition front. HiVolt, the company’s most recent purchase, is performing as expected, along with five other acquisitions made in the past 14 months.

Meanwhile, the company’s leverage ratio (a measure of financial leverage) has fallen to 1.45 times earnings, below the low end of its target range of 1.5 to 2 times, providing additional financial flexibility. .

With a strong portfolio of successful designs, solid cash flow and a disciplined acquisition strategy, discoverIE appears well positioned to meet any lingering market challenges and continue its steady long-term growth.

The company operates in fast-growing sectors, with between 30 and 40 percent of its revenue generated by transportation, renewable energy and medical technology, and a similar proportion from industrial and connectivity applications.

Long term trends

It will benefit from several long-term trends, including the shift toward electric solutions in industries driven by automation and carbon reduction goals, as well as the expansion of rail transportation.

Greater investment in renewable energy and advances in artificial intelligence (AI) and sensor technology in the healthcare sector are also likely to boost its business.

In this context, the current share price weakness could represent an opportunity. However, opinion in the City is divided.

Shore Capital, for example, believes that despite the company’s long-term potential, DiscoverIE stock remains somewhat overvalued at current levels.

Elsewhere, Peel Hunt values ​​the shares at 1,000p, a 56 per cent premium to the current price, while Stifel is a “buy” up to 975p.

He adds: “With valuations back to modest levels and the group trading profitably through the nadir, we think shares look attractive here.”

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