It’s a name familiar to almost everyone in Switzerland. But on the stock market Phoenix Mecano has rather lived in the shadows for a couple of decades now. Although the stock price has risen strongly since October 2022, it remains far off its historic highs. But at the same time, the company has recorded steady growth since its IPO back in 1988 – together with a sharp rise in profits recently.
Enclosures/housings, electronic components, and drive solutions for comfort furniture – this might not sound all that sexy to investors at first glance. After all, aren’t suppliers in this industry to a greater or lesser extent slaves to the pricing diktats of their customers? Such at least is the prevailing view. But smart companies grow with the market, taking advantage of structural change as well as specialization in the division of labour on the production side to work their way steadily up the value creation chain.
Company evolution
After it was founded in 1975, Phoenix Mecano initially focused on the production and sale of industrial gases for the welding industry. The company then built up expertise in the field of welding torches, which in turn led it to the manufacture of housings for the expanding electronics industry. Right from the start, the company was interested in identifying “sweet spots”. Thanks to takeovers, its position in the world of enclosures and electronic components was already expanding even at this early stage of its development.
Sales growth of 7.1% annually since IPO in 1988
Phoenix Mecano floated on the stock market in 1988. Its sales growth since the IPO works out at an average of 7.1% p.a., which is truly impressive over a period of 35 years. The company’s target is to grow organically by between 4% and 6% annually. When opportunistic acquisitions are included, the target bandwidth for annual growth rises to 6–10%. The company is selective in this respect – potential takeover targets must complement the product portfolio and facilitate access to new customer groups and market segments. As Phoenix Mecano operates internationally, another objective is to increase market share in local markets.
Global player
Many of the industries the company now services – including measurement and control technology, medical technology, mechanical and plant engineering, automotive, electronics, energy, as well as home/nursing care – are globally distributed, and are often grouped into clusters. For this reason, Phoenix Mecano has a presence in more than 60 locations worldwide, and above all where its customers are based, i.e. in the majority of European countries from Spain to Sweden, in Turkey, Tunisia, Brazil, Chile, the US, India, China, and Malaysia. Its workforce currently comprises 3,000 employees in Europe and Asia, 1,600 in Africa, and 250 in the Americas.
OEM partnership
The pressure to innovate in the above-mentioned industries is considerable. Moreover, safety is of critical importance. Suppliers to original equipment manufacturers (OEMs) are not changed just like that, particularly if they have proven themselves to be reliable, adaptable, and relentlessly focused on quality. At the levels of value creation where Phoenix Mecano operates, suppliers of systems, components, and critical parts are viewed not so much as a cost factor but as partners that can contribute to efficiency increases and flawless production processes. In addition, not every competitor can meet all requirements when it comes to the necessary certifications. Ever since the 1990s, OEMs have been increasingly tending to procure whole subsystems as well as critical components entirely from proven outsourcing partners. In other words, with every year that passes, the moat that new and old competitors have to cross becomes ever deeper and wider.
Value creation at a glance
At the same time, Phoenix Mecano keeps a close eye on its return on capital and profit margins, which explains why it seeks out high-margin business areas and relinquishes business activities in areas that start showing signs of decline. The company’s profit focus is reflected in its use of the metric “economic value added” – or EVA for short. It calculates the return on equity after capital costs and forms one part of the return on capital employed (ROCE) which also takes into account the costs of debt capital.
Synchronization with megatrends
Four megatrends lie at the heart of Phoenix Mecano’s business strategy: automation, digitalization, demographic change, and decarbonization. The Enclosure Systems and Industrial Components business areas offer a comprehensive spectrum of products to all the industries served by the company. Among others, these include intra-logistics solutions, instrument transformers and housings for charging stations, e-mobility, and internet-of-things applications. The third business area is the DewertOkin Technology Group, which focuses on drive and control systems for electrically adjustable comfort and healthcare furniture, as well as ergonomic workplace solutions. In addition, hospitals are supplied with software for patient-oriented services and processes.
Change in demand trends since 2022
The company’s figures for 2022 and the first quarter of 2023 reveal a slight decline in sales volumes, but a rise in profitability. Since the start of October 2022, the stock has risen from CHF 300 to around CHF 420, which equates to a rise of 40%. The trends of the prior year continued in the first few months of 2023. Whereas the enclosures and industrial components segments recorded sales increases of 4% and 15.5% respectively in the first quarter of 2023 sales generated in the area of drive systems for comfort and healthcare furniture declined by 13%. Two business units were divested, with the result that group sales declined by 0.5% to CHF 208.9 million in the first quarter. After adjustment for the effects of disposals and currency influences, organic growth worked out at 3.7%. While the order intake declined by 9% (4% on an adjusted basis) for economy-related reasons in Q1, EBIT surged by a fifth to CHF 15.6 million, resulting in a respectable EBIT margin figure of 7.5%. However, quarterly profit rose by just 1.3% to CHF 10.5 million. One striking factor is the company’s positive outlook for the full year: Phoenix Mecano is anticipating further increases in its key metrics along with a double-digit percentage rise in EBIT.
Profit increase of 29% in 2022
In 2022, sales declined by 3% to CHF 792.9 million. This was essentially due to developments in the area of drives for comfort and healthcare furniture, which recorded a sales decline of 21%. By contrast, sales in the enclosures and industrial components segments recorded impressive double-digit growth rates. EBIT rose strongly by 20% to CHF 53.5 million, and net profit by as much as 28.9% to CHF 39 million. The main reason for the partial weakness is the high comparative prior-year base for the sale of comfort furniture against a backdrop of pandemic, which caused the US in particular to experience a unique „home-nesting“ economy that proved beneficial to Phoenix Mecano. Viewed in this light, the decline in sales in recent quarters should be viewed as nothing more than a process of normalization and reversion to the mean. By contrast, the booming demand in the two other business areas appears to be more of a structural rather than a cyclical nature.
Safety-relevant products
A key reason for this is likely to be the company’s focus on the megatrends of digitalization, automation, and decarbonization. These three trends are also inextricably linked. Internet-of-things applications contribute to efficient and therefore resource-preserving processes. Energy efficiency leads to savings. Intelligent innovative products such as vibration absorbers can make a decisive contribution to minimizing the disruption to human and animal wellbeing from wind turbines, which is in turn conducive to higher acceptance levels. And in the area of electro-mobility, secure housings are required to protect passengers from potentially lethal discharges or even explosions.
Setting sustainable targets
Decarbonization has rocketed to the top of most corporate agendas, and now encompasses almost every area of products and indeed their production processes. OEMs pass on the requirements imposed on them to their suppliers – and only those who can keep up can remain in business. Phoenix Mecano has recognized the strategic importance of decarbonization, and is now developing products for the industries growing up around renewable energies, as well as redesigning its own production processes. With effect from 2022 the company is now publishing a Sustainability Report, which specifies objectives and documents progress. For example, energy consumption declined by 6% in 2022. 21% of energy is now derived from renewable sources, a figure that will continue to rise. The company’s properties are gradually being fitted with photovoltaic systems, the aim being to cover 10% of all company energy consumption through self-produced solar energy.
Hydrogen – a gas with a future
A good example of the foresight shown by management is the company’s positioning in the area of “green hydrogen”, which is now on everyone’s lips but typically no further advanced than the pilot stage in industrial practice. One thing is already crystal clear, however: The production, storage, and transport of hydrogen and its application in practice are fraught with explosive risk. Before any wider application in the economy is possible, all dangerous aspects must first be identified and addressed. Phoenix Mecano is already well-positioned here, and is delivering explosion-proof housings for this emerging new industry, including housings for the process control and monitoring of hydrogen electrolysis. Without protected controls, switches, and electrical connections, a functioning hydrogen industry simply cannot exist.
Summary
With the ongoing development of its product portfolio and optimization in alignment with fast-growing, innovation-leading industries, Phoenix Mecano is on the cusp of a new phase of transformation with any amount of potential. Growth stimuli are coming from climate change, from the accompanying energy and mobility transition, and from digitalization and automation. As a reliable supplier of subsystems and critical components, the company has become an integral part of our era’s structural change. What’s more, Phoenix Mecano also ticks two vital boxes in the form of credibility and integrity. It is looking to reduce its CO2 emissions to zero by 2050, and to achieve 50% of this target by 2030. Despite employing many workers in countries with no union representation, the company ensures that working conditions are in alignment with democratic benchmarks, and inspections of sub-contractors are carried out to review compliance with social criteria.
The latest sustainability trends are already pointing to accelerated growth on the part of the new industries. It would therefore not be surprising for the stock to now wake up from its slumber of so many years and blossom again. Despite an impressive price rise over the last seven months, Phoenix Mecano stock still looks cheaply valued when subjected to fundamental analysis. The P/S ratio amounts to just 0.5x, the P/E ratio 8.5x, and the dividend yield of 4.4% is similarly enticing. Furthermore, with an equity ratio of 44.5% the company is well prepared to tackle the challenges that lie ahead. In the event of the above-average earnings development continuing, the stock should have further upside potential.
