Saturday, November 26, 2011

Diary: lms, weir, sge, sgp

Reasons to be bullish

Despite all the doom-and-gloom surrounding the world economy, there is actually some bullishness about.

F958B has written on Motley Fool:
Of all the asset classes out there, shares are among the least expensive asset classes. Shares are slightly cheap. Commodities are overvalued. Bonds are overvalued. Property is overvalued. Cash earns next to nothing. The last time that the dividend yield on shares was this attractive relative to bond yields was during the depths of the 1970's stockmarket bear. From the troubled mid-1970's to early 1980's, stockmarkets began a 25-year bull market (1975-2000), but the first several years were very erratic and volatile - but the trend was still up, on balance. The share-price lows were in the mid-1970's (several years after the mid-late 1960's peak), but the P/E lows were in the early 1980's (about a decade-and-a-half after the 1960's P/E peak).
 There's an interesting article on ValueWalk (does it ever print a boring one?) pointing out the bull case. Sketch notes below.

Investor sentiment in extreme pessimism range, although it is improving. Ms Sonders contends is that all macro is priced in. Flight to quality (I think she's refering to bonds though, not defensives) could backfire, as there has already been heavy outflows of equity funds into bond funds. Five-year normalized P/E slightly above median, but forward PEs are dirt cheap (her graph shows that they're almost at the cheapest levels they've been since the graph began in 1990).

LMS - LMS Capital - Equity investment instruments - 56.3p/£153m

Spotted this one on in an article on 24-Oct-2011 in Investors Chronicle - almost seems a no-brainer. It is currently trading at 0.72 PTBV. The idea is simple enough. LMS invests in a portfolio of quoted securities. The company is winding down in an orderly fashion. So shareholders should realise significantly more than current share price.

WEIR - Weir Group - Industrial Engineering - 1776.1p/£3.8bn

This one might be of interest to those looking for quality compounders. It has increased its divvies every year for the last decade, and analysts expect the trend to continue (don't they always?). It has a low yield at only 1.8%, trades on a PER of 14.1, and has a z-score of 3.77. Net debt is £289m, against net profits at the interim stage of £119m. So, debt situation looks very comfortable. It has a ROE of 21%, and median for the last decade is 18%.

Nigel Thomas, an "alpha" rated manager at AXA Framlington UK Select Opps, has it as his number one holding at 5.1%.

Business activities according to Google:
 The Weir Group PLC operates in three segments: Minerals, Oil and Gas, and Power and Industrial. The Minerals segment designs and manufactures pumps, hydrocyclones, valves and other equipment for the mining, flue gas desulphurisation and oil sands markets. The Oil and Gas segment manufactures pumps and ancillary equipment and provides aftermarket support. The Power and Industrial segment designs, manufactures and provides aftermarket support for rotating and flow control equipment to the global power generation and industrial sectors. Other segments supplies equipment to the liquefied petroleum gas marine and onshore markets.

Some sketch notes on the latest IMS issued 07-Nov-2011:
  • market conditions remain strong
  • reported order input was up 27% in the quarter
  • macro-economic uncertainties haven't had any impact
I'm not sure how dependent all this is on the commodity "supercycle", mind.  Anyway, it certainly looks good.

SGE - Sage Group - Software and Computer Services - 265.2p/£3.5bn

Here's another one for you quality compounderers out there. It's been on my radar for awhile, and it's been part of my Defensive portfolio over on Stockopedia (just don't ask how the value portfolio is doing!). Business activities:
development, distribution and support of business management software, and related products and services for medium-sized and smaller businesses. It operates in four segments. Its products and services range from accounts, enterprise resource planning (ERP) and payroll software to payment processing, customer relationship management (CRM) and industry-specific solutions, such as healthcare, manufacturing, non-profit and construction.

Book-keeping software, in a nutshell. Quite a sticky product, and I think that many people would have heard of the Sage accounting system. SGE recently appeared in a Citywire article on "7 tech stocks help by top UK fund managers". I don't own any SGE, but it's a possibility, and the article also mentioned IDOX, which I do own, and has actually been doing very well for me. But I digress.

SGE has a z-score of 3.13, net debt of £73m compared with interim net profits of £118m. So debt looks perfectly comfortrable. It's trading on a PER of 13.6, which is fine by me. Yield at 3.0% is pretty good. Growth for the next two years is expected to be low, though. It currently has a ROE of 14.8%, compared with a decade median of 15.5%. Looks like it will be a solid company, if performance might be expected to be unspectacular.

SGP - Supergroup - Personal Goods - 475p/£381m

Riskier one that's been getting a lot of attention lately due to 2 management logistical errors. Business activities:
SuperGroup Plc, formerly DKH Clothing Plc. is United Kingdom-based retailer. It focuses on the youth fashion market with its clothing and accessories for both men and women. The Company has two segments: Retail and Wholesale. Retail comprises the operation of stores, concessions and internet sites. Revenue is derived from the sale to individual consumers of its brand and third party clothing, shoes and accessories. Wholesale comprises the wholesale distribution of its branded products (clothes, shoes and accessories) worldwide and the design and ownership of brands. It has 42 standalone retail stores and 56 concessions and a large number of wholesale relationships. Superdry is sold in approximately 70 countries worldwide via its websites, and in 36 overseas countries through a network of distributors, licensees, agents and franchisees. In February 2011, the Company acquired the Benelux and France franchise and distribution partner, CNC Collections BVBA, from its principal Luc Clement.
The words "youth fashion market" will be enough to make many run, not walk, away from this one.  SGP is expected to have fast growth in 2012 and 2013, having exhibited fast growth in 2010 and 2011 since it was floated. It has net cash of £32m, negative tangible gearing, and a whopping z-score of 7.0. It currently trades on a PER of 9.6.

The FT has an article on 05-Oct-2011:
  • shares lost more than quarter of value after it warned that stock management problems would wipe up to £9m from full-year profit
  • the IT system problems has led to delays in moving stock to UK stores and forced it to rent temporary warehouse space
  • international and wholesale operations are unaffected
  • almost two-thirds of shares are owned by senior management
  • the shares floated in 2010 at 500p in March 2010, rose to almost £19. Ouchies!
 There's a thread on Motley Fool, which raises the points:
  • paulypilot was tempted (at 685p on 05-Oct-2011)
  • it's significant to note that the problem is with the back end processing, not with demand
FT Alphaville notes the following:
  • suspicion surrounds the timing of the warning. It wasn't raised at the AGM on Sep 22, nor in the preceding week when staff sold shares, nor a month ago at the trading statement
  • poster speculates that the real reason for the slowdown in sales were not with warehouse issues, but with brand coming off the boil
  • "exacerbated by the unseasonal weather" [oh dear, I hate it when companies talk about unseasonal weather], and "uncertain economic outlook" [and I especially don't like that]
  • Brokers Espirito "maintain sell", saying that 16X forward PE is too high given riskiness of growth. They thought that the market may re-rate the shares [turns out they were exactly right. Their we go then. Analysts. They're not just for show].
Should be interesting to see how this one plays out.  My guess is that they will sort out their problems and the stock will be up again. Long term: French Connection, 'nuff said!

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