Back in August, I sangthe praises of Gear4music (LSE: G4M), the UKs biggest online retailer of musical instruments and equipment.Since then, its shares have rocketedfrom 165p to 294p (a 78% rise). While some early investorsmight be tempted to bank profits at this stage, I suspect this period of outstanding performance represents just the start of Gear4musics ascent.Letstune in to recent developments.
Striking a chord with consumers
Last month, the companyissued another trading update. Positively, the sales momentum highlighteda couple of months earlierhad been sustained.Total saleswere up a cymbal-crashing73% (to 21.6m) for the six-month period to 31 August compared to the previousyear. The figures from continental Europe played a significant part in this, with sales jumping a whopping 169%.
Given this excellent run of form, its unsurprising that Gear4music hasdecided 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.
Thats right 100m. Now reflect on the fact that you could effectively buy the whole companytoday for 60m, based on its current market capitalisation. All thisbefore weve even considered the recent fall in sterling and how musically-inclined customers in the4.3bn European market may wish to take advantage of this.
Is the best yet to come?
Based on the aforementionedtrading updates, Im confident thatthis months interim results (released on 18 October) will simply reaffirm the investment case for Gear4music. Indeed, over the next week, I wouldnt be surprised to see the share price rise further in expectation of overwhelmingly positivefigures. And, of course, theres Christmas to think about.Thanks to the big ticket nature of most musical instruments, its likelythat the festive periodwill ensure the businesshasa cracking end to the year.
As the orders continue to flood inand more local, family-run firms find it difficult to compete with the massive range and competitive pricing it offers, Gear4musicwill surelycement its status asthe 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 understandablypicky musicians will optto shop there rather than througha specialist supplier. Riskinga few pounds on a CD by a relatively unknownartist is one thing, spending several hundred pounds on a new guitar or drum kit is something else entirely. Those just starting to learn an instrumentare also likely tovalue the expertise offered by the York-based firm. And while some may questionthe legitimacy ofonline reviews in general,its worth taking a look at some of the feedbackposted on sites like trustpilot.comfor evidence of how much itappears to care about itscustomers.
Based on its performance over the last couple of years, Gear4music looks like a class act (and possible takeovertarget). Arolling 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 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 withBrexit (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.
If you’re worried about what our forthcoming departure means for your investments, I strongly encourage you to read a special FREE report written by the experts at the Motley Fool. Brexit: Your 5-step Survival Guide should be all you need to know for organising your portfolio.
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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.