One micro-cap hitting all the right notes
Back in August, I sang the praises of Gear4music(LSE: G4M), the UK's biggest online retailer of musical instruments and equipment. Since then, its shares have rocketed from 165p to 294p (a 78% rise). While some early investors might be tempted to bank profits at this stage, I suspect this period of outstanding performance represents just the start of Gear4music's ascent. Let's tune in to recent developments.
Striking a chord with consumers
Last month, the company issued another trading update. Positively, the sales momentum highlighted a couple of months earlier had been sustained.Total sales were up a cymbal-crashing 73% (to £21.6m) for the six-month period to 31 August compared to the previous year. The figures from continental Europe played a significant part in this, with sales jumping a whopping 169%.
Given this excellent run of form, it's unsurprising that Gear4music has decided to open two distribution centres in Europe by the end of year. The first, in Sweden, should be operational in November. As CEO (and 41% owner) Andrew Wass indicates, these plans suggest great things for the business in the years ahead:
"These first two distribution hubs will not only transform our European customer proposition, but also increase the overall capacity of our business to deliver over £100m revenues."
That's right - £100m. Now reflect on the fact that you could effectively buy the whole company today for £60m, based on its current market capitalisation. All this before we've even considered the recent fall in sterling and how musically-inclined customers in the £4.3bn European market may wish to take advantage of this.
Is the best yet to come?
Based on the aforementioned trading updates, I'm confident that this month's interim results (released on 18 October) will simply reaffirm the investment case for Gear4music. Indeed, over the next week, I wouldn't be surprised to see the share price rise further in expectation of overwhelmingly positive figures. And, of course, there's Christmas to think about. Thanks to the 'big ticket' nature of most musical instruments, it's likely that the festive period will ensure the business has a cracking end to the year.
As the orders continue to flood in and more local, family-run firms find it difficult to compete with the massive range and competitive pricing it offers, Gear4music will surely cement its status as the dominant player in a highly fragmented industry. True, online giants like Amazon also sell musical instruments and equipment (including those produced by the former) but I struggle to be convinced that understandably picky musicians will opt to shop there rather than through a specialist supplier. Risking a few pounds on a CD by a relatively unknown artist is one thing, spending several hundred pounds on a new guitar or drum kit is something else entirely. Those just starting to learn an instrument are also likely to value the expertise offered by the York-based firm. And while some may question the legitimacy of online reviews in general, it's worth taking a look at some of the feedback posted on sites like trustpilot.com for evidence of how much it appears to care about its customers.
Based on its performance over the last couple of years, Gear4music looks like a class act (and possible takeover target). A rolling price to earnings (P/E) ratio of 33 seems more than justified.
What about Brexit?
Micro-caps may not be to everyone's taste, particularly those with short investing horizons. Even if you do have many years of investing ahead of you and several market minnows on your watchlist, June's momentous vote to leave the EU may be enough to discourage you from clicking the buy button. While I'm confident that Gear4music will overcome any short-term issues connected with Brexit (it it encounters any at all), the same might not apply to other less nimble companies, particularly those the derive a significant amount of revenue from the UK.
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Paul Summers owns shares in Gear4music. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.