Down 15% in 4 months, is it time to buy this ASX growth stock?

I think this ASX growth stock is a great performer.

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PWR Holdings Ltd (ASX: PWH) is a leader in advanced cooling systems, supplying Formula 1 teams, automotive and other tech industries.

Its shares have consistently delivered good returns to their holders. However, since hitting its all-time high of $12.98 in February following its robust 1H FY24 results, the shares have traded weaker, down more than 15%.

Is this recent drop a good time to buy this ASX growth share?

A global leader in cooling systems

Established in 1997 by its current CEO, Kees Weel, PWR Holdings designs, develops, and manufactures advanced cooling systems.

But it's more than just a radiator producer. The company is a global leader in this niche, delivering high-performance products across the motorsport, automotive, aerospace and defence sectors. In 1H FY24, the company reported a 22% growth in its revenue to $64.2 million.

The motorsport sector is the largest business unit, representing 47% of its 1H FY24 revenue. The company is renowned for its cutting-edge cooling systems used in high-performance motorsports, including Formula 1. PWR's products are designed to withstand the extreme conditions of competitive racing.

In the automotive sector, representing 22% of its revenue, PWR provides bespoke cooling solutions for high-end and luxury vehicles. Its products are designed to enhance the performance and reliability of supercars and luxury automobiles.

The aerospace and defence sector is relatively new but growing rapidly, with its revenue contribution rising to 12% in 1H FY24 from just 7% a year ago.

PWR Holdings serves a diverse customer base across multiple continents. For the last 12 months to December 2023, PWR generated approximately 90% of its total revenue overseas, mainly in the United Kingdom and the United States.

Superior margins and return on investment

Its precision-focused product portfolio contributed to superior profit margins. PWR Holdings consistently delivers gross margins of 77% to 80%. Operating profit margins have a wider range but are still well above 20%. This level of profitability is exceptional for a manufacturer.

Such high margins flow down to its returns on equity (ROE) of approximately 29%. Impressively, the company maintained such high ROEs over the past decade, with the lowest point being 24% in FY20 during the COVID-19 pandemic.

Are PWR Holdings shares too expensive?

PWR Holdings has demonstrated robust financial performance, driven by its diversified revenue streams and strong market position.

But, some investors may find its current valuations too lofty.

PWR Holdings shares are currently traded at 34x FY25 earnings estimates by S&P Capital IQ. While this is high compared to other manufacturers on the ASX, this is actually not too bad relative to its own price-to-earnings (P/E) ratio history of 20x to 52x.

The market anticipates PWR Holdings' earnings per share to increase by more than 20% each year in FY25 and FY26. If the company can meet these expectations, the current multiple may still be justified.

The PWR Holdings share price closed flat at $10.96 on Friday. At the current price, the shares offer a dividend yield of 1.25%.

Motley Fool contributor Kate Lee has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended PWR Holdings. The Motley Fool Australia has positions in and has recommended PWR Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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