Down 15% in 4 months, is it time to buy this ASX growth stock?

I think this ASX growth stock is a great performer.

| More on:
kid riding a plastic go kart with his hands raised in the air with mountains in the background symbolising winning a race

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

PWR Holdings Ltd (ASX: PWH) is a leader in advanced cooling systems, supplying Formula 1 teams, automotive and other tech industries.

Its shares have consistently delivered good returns to their holders. However, since hitting its all-time high of $12.98 in February following its robust 1H FY24 results, the shares have traded weaker, down more than 15%.

Is this recent drop a good time to buy this ASX growth share?

A global leader in cooling systems

Established in 1997 by its current CEO, Kees Weel, PWR Holdings designs, develops, and manufactures advanced cooling systems.

But it's more than just a radiator producer. The company is a global leader in this niche, delivering high-performance products across the motorsport, automotive, aerospace and defence sectors. In 1H FY24, the company reported a 22% growth in its revenue to $64.2 million.

The motorsport sector is the largest business unit, representing 47% of its 1H FY24 revenue. The company is renowned for its cutting-edge cooling systems used in high-performance motorsports, including Formula 1. PWR's products are designed to withstand the extreme conditions of competitive racing.

In the automotive sector, representing 22% of its revenue, PWR provides bespoke cooling solutions for high-end and luxury vehicles. Its products are designed to enhance the performance and reliability of supercars and luxury automobiles.

The aerospace and defence sector is relatively new but growing rapidly, with its revenue contribution rising to 12% in 1H FY24 from just 7% a year ago.

PWR Holdings serves a diverse customer base across multiple continents. For the last 12 months to December 2023, PWR generated approximately 90% of its total revenue overseas, mainly in the United Kingdom and the United States.

Superior margins and return on investment

Its precision-focused product portfolio contributed to superior profit margins. PWR Holdings consistently delivers gross margins of 77% to 80%. Operating profit margins have a wider range but are still well above 20%. This level of profitability is exceptional for a manufacturer.

Such high margins flow down to its returns on equity (ROE) of approximately 29%. Impressively, the company maintained such high ROEs over the past decade, with the lowest point being 24% in FY20 during the COVID-19 pandemic.

Are PWR Holdings shares too expensive?

PWR Holdings has demonstrated robust financial performance, driven by its diversified revenue streams and strong market position.

But, some investors may find its current valuations too lofty.

PWR Holdings shares are currently traded at 34x FY25 earnings estimates by S&P Capital IQ. While this is high compared to other manufacturers on the ASX, this is actually not too bad relative to its own price-to-earnings (P/E) ratio history of 20x to 52x.

The market anticipates PWR Holdings' earnings per share to increase by more than 20% each year in FY25 and FY26. If the company can meet these expectations, the current multiple may still be justified.

The PWR Holdings share price closed flat at $10.96 on Friday. At the current price, the shares offer a dividend yield of 1.25%.

Created with Highcharts 11.4.3PWR Holdings PriceZoom1M3M6MYTD1Y5Y10YALL21 Jun 202321 Jun 2024Zoom ▾Jul '23Sep '23Nov '23Jan '24Mar '24May '24Jul '23Jul '23Oct '23Oct '23Jan '24Jan '24Apr '24Apr '24www.fool.com.au

Motley Fool contributor Kate Lee has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended PWR Holdings. The Motley Fool Australia has positions in and has recommended PWR Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

ASX 200 retail shares a woman smiles over the top of multiple shopping bags she is holding in both hands up near her face.
Opinions

Up 90% in a year, is it too late to buy Zip shares?

Should investors buy this stock now or wait until later?

Read more »

A trio of ASX shares analysts huddle together in an office with computer screens all around them showing share price movements
Opinions

2 of the best ASX 200 shares to buy right now

I think these stocks are excellent buys for the long-term.

Read more »

Concept image of a businessman riding a bull on an upwards arrow.
Opinions

I'm very bullish on these 2 ASX stocks

I think these are two of the best ASX investments money can buy.

Read more »

Young businesswoman sitting in kitchen and working on laptop.
Opinions

Should I buy Berkshire Hathaway or Soul Patts shares?

Both have been stand out investments over the long term.

Read more »

A photo of a young couple who are purchasing fruits and vegetables at a market shop.
Opinions

Here are 2 of the ASX's most hated shares. Which should I consider buying?

Could today's dogs be tomorrow's stars?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Opinions

Where I'd invest $5,000 into ASX shares today

I’m excited by what these stocks can achieve.

Read more »

An analyst wearing a dark blue shirt and glasses sits at his computer with his chin resting on his hands as he looks at the CBA share price movement today
Opinions

What are Soul Patts shares worth?

This company has delivered strong gains. But what is its intrinsic value?

Read more »

Two funeral workers with a laptop surrounded by cofins.
Opinions

2 exciting ASX 300 shares on sale right now

I’m bullish about these exciting businesses.

Read more »