Eleco (LON:ELCO): A Hidden Gem with Consistent EPS Growth and Insider Backing

In a market crowded with speculative bets and overhyped tech stocks, Eleco Plc (LON:ELCO) emerges as a quietly compelling opportunity for growth investors. This small-cap software firm, specializing in construction project management and built-environment solutions, has delivered steady earnings growth, bolstered by significant insider confidence. Despite a high valuation, its fundamentals—16–19% annual EPS growth, stable margins, and strategic purchases by executives—suggest it merits a place on watchlists for disciplined investors. Let's dissect its potential and risks.

A Proven Track Record of EPS Growth

Eleco's financials paint a picture of consistent profitability. In its latest quarterly results (May 2025), the company reported an EPS of 5.10p, marking a 19% increase from the same period in 遑2024. Analysts forecast 6p EPS for the full fiscal year, implying further momentum. This growth isn't a flash in the pan: historical data shows a 16–19% annual EPS expansion over the past three years, fueled by its dominant software products like Asta Powerproject and VEEUZE, which cater to construction firms and infrastructure projects globally.

The company's net margin of 9.46% and return on equity (ROE) of 10.5% underscore operational efficiency. These metrics are critical in a sector often plagued by margin pressure, making Eleco's stability a rarity.

Insider Buying Signals Confidence

The most compelling catalyst for Eleco is its insider buying spree, which has totaled £8.5 million over the past three months. Notable transactions include:
- Mark Castle, a key insider, acquiring 69,174 shares at £2.20 on June 4, and additional purchases in early June.
- James Pellatt, a Non-Executive Director, buying 6,052 shares at £2.22 on June 19—a direct vote of confidence in the stock's near-term prospects.

Collectively, insiders now own 51.92% of Eleco's shares, a stake that grows with each purchase. Such activity is rare among small-cap firms and signals management's belief that the stock is undervalued.

Valuation: A High P/E, But Justified?

The company's P/E ratio of 45.76 (as of June 2025) raises eyebrows. Critics may argue this is excessive for a software firm, but context matters. Eleco's market cap of £135 million is dwarfed by its growth trajectory and niche position in the £2.3 billion global construction software market. Canaccord Genuity's “Buy” rating—with a target price of £176—suggests analysts see upside potential.

Technical traders will note the stock is near its 52-week high of £165, but the 200-day moving average at £140.76 acts as a key support level. A dip to this level could present an attractive entry point, especially if earnings momentum continues.

Risks to Consider

No investment is without risks. Eleco's debt-to-equity ratio of 4.79 is elevated, raising concerns about leverage. Additionally, the software sector faces macroeconomic headwinds, such as delayed infrastructure projects in key markets like the UK and Europe. A sharp rise in interest rates could also pressure its valuation.

Investment Thesis: A Watchlist Candidate

For growth-oriented investors, Eleco's blend of earnings momentum, insider support, and market leadership makes it a compelling long-term play. While the P/E ratio is high, it's justified if the company can sustain its EPS growth trajectory. The 200-day moving average (currently £140.76) serves as a tactical reference: dips to this level could offer better entry points, especially if insider buying accelerates.

Final Take

Eleco is no low-risk investment. Its valuation demands patience and a tolerance for volatility. However, its proven profitability, strategic product portfolio, and executive confidence position it as a standout small-cap opportunity. For investors willing to look beyond headlines, Eleco deserves a place on watchlists—particularly if the stock retraces to its 200-day MA.

Monitor developments closely, and consider dollar-cost averaging into dips to mitigate risk.