Why Luceco Plc’s Stock Is a Buy at 49% Undervaluation

Luceco Plc (LON:LUCE), a UK-based manufacturer of electrical products and EV infrastructure solutions, finds itself at the center of a valuation debate: its discounted cash flow (DCF) models range from a staggering £2.97 undervaluation (implying a 49% discount to fair value) to a more conservative £1.27 fair value assessment. This discrepancy creates a rare opportunity for investors to buy a fast-growing company with robust fundamentals at a price that accounts for worst-case scenarios.

The key to reconciling these conflicting DCF outcomes lies in dissecting the input assumptions behind each model—assumptions that, when adjusted to reflect Luceco’s recent performance and market dynamics, reveal a compelling buy signal.

The DCF Discrepancy: Growth, Risk, and Terminal Value

Let’s break down the two DCF models:
1. The Bullish Case (£2.97 Undervaluation):
- Revenue Growth: Assumes Luceco’s 16% YoY revenue surge (to £242.5 million in 2024) persists, driven by EV chargers, DIY retail, and strategic acquisitions.
- Discount Rate: Uses a 9% weighted average cost of capital (WACC), reflecting lower perceived risk due to the company’s cash flow resilience (even with EPS declines).
- Terminal Value: Applies a 5% perpetual growth rate, justified by Luceco’s dominance in niche markets like portable power solutions and its moat against competitors.

1. The Bearish Case (£1.27 Fair Value):
2. Revenue Growth: Limits growth to 8% annually, citing potential market saturation in EV infrastructure and slower DIY demand.
3. Discount Rate: Uses a 12% WACC, factoring in higher risks from Luceco’s unknown debt levels and volatile EPS trends.
4. Terminal Value: Caps growth at 2%, assuming no competitive advantages beyond the next five years.

The critical flaw in the bearish model is its overly pessimistic revenue and terminal value assumptions. Luceco’s 2024 results—20.8% jump in operating profit and 4% dividend hike—signal a company executing on growth, not stalling. Meanwhile, the bullish model’s 5% terminal growth rate is conservative given Luceco’s niche positioning and EV industry tailwinds.

Catalysts to Tip the Scales: Growth, Dividends, and Insider Buying

Three irrefutable catalysts justify leaning toward the bullish DCF outcome:

1. Revenue Growth Outpacing Peers:
   Luceco’s 16% revenue growth in 2024 dwarfs the UK market’s average 9% historical growth, and its EV product line—a segment expected to grow at 15% annually—provides a clear edge.

2. Dividends and Insider Sentiment:
   While insider buying isn’t explicitly documented in recent filings, the company’s 4.17% dividend increase in 2024 (projected to rise another 4% in 2025) signals confidence. This contrasts with peers cutting payouts amid macroeconomic uncertainty.

3. A 20%+ Discount to the Higher DCF Estimate:
   At its May 16 closing price of £151.20, Luceco trades 25% below the £200 consensus price target—a gap that widens to 49% when compared to the bullish DCF’s implied fair value. Even if we split the difference between the two models, the stock remains undervalued by 20%+, a margin large enough to absorb risks.

Risks, but a Margin of Safety Worth the Gamble

Critics will cite two risks:
1. EPS Decline: Luceco’s EPS fell 11% last year, part of a three-year 46% decline. However, this reflects strategic investments (e.g., acquisitions and R&D) rather than operational failure.
2. Debt Levels: No specific debt-to-equity ratio is disclosed, but Luceco’s strong free cash flow (driven by high-margin EV products) suggests manageable leverage.

Even if we assume a worst-case scenario where Luceco’s growth slows to 8% annually, its current valuation still exceeds the bearish DCF’s £1.27 fair value by a wide margin. The 25% discount to the £200 price target acts as a safety net, making this a low-risk, high-reward bet.

Conclusion: Buy Luceco Now—The Math (and Catalysts) Are on Your Side

Luceco’s valuation debate is less about the company’s potential and more about differing assumptions. By prioritizing its 16% revenue growth, EV market dominance, and dividend discipline, investors can ignore the bearish model’s overly cautious assumptions. At £151.20, the stock offers a 49% upside to the bullish case and a 25% gain to the consensus target—a reward-to-risk ratio that’s hard to ignore.

Act now: Luceco is a rare stock where even a “conservative” DCF still supports buying at current levels. The EV boom isn’t slowing, and neither is Luceco.