A growth stock update

A growth stock released a trading update...

3/6/2015

...today for the 13 weeks to 31st May 2015 have been released in a brief statement today. The stock concerned is W.H. Smiths (SMWH) and as I mentioned at the weekend in my Month end review, this is one that features in the Mechanical Compound Income Scores Portfolio so I thought I would do a quick write up on it.

This is a classic example of what I am trying to identify by running this model portfolio based on the scores and allowing it to buy stocks that one's initial reaction is to say huh I'm not buying that. I guess that might have been your reaction when you read that I was suggesting Smiths as a growth stock as the natural reaction is that it is a chain of newsagents which are in decline.

However while that may be true to an extent, in the update today they highlight the on going growth in their travel business. These are the outlets that they have at railway and service stations in this country and at airports around the world. These benefit from captive audience / monopoly supplier type of arrangements at these locations. This part of the business has historically and currently continues to drive the growth with 8% and 4% sales growth and like for likes respectively. This helps to offset the on going planned decline in the newsagents on the high street where they try to maximise the margins and cash flow from these to reinvest in the higher returning travel units.

On the back of this they have grown their earnings and dividends by 13% and nearly 16% per annum since 2009 so that is why I call it a growth stock. In addition take a look at the chart below and be prepared for another surprise!

So it seems like another good, if brief, update from Smith's today as the shares are up by another 3% or so to nearly 1600p at pixel time. However it is worth noting that according to the FCA data this one has been and continues to be one of the most shorted stocks in the UK market, currently just under 8%. Given how they keep delivering and confounding expectations though you would have thought all the shorts would have retired hurt by now unless they have an even better long paired with it.

Any way I guess on valuation grounds it is perhaps getting a bit more stretched now as the market has clearly recognised the merits of their dual grow and shrink strategy. This has left it on around 18x with a 2.5% yield for the year to August 2015 which cannot be described as a bargain. However, given it continues to do well overall and scores well on the other metrics I look at it still scores highly on the Compound Income Scores and is likely to remain in the Mechanical portfolio.
Of course the natural reaction is oh I've missed it I'm still not buying it now so it will be interesting to see how it goes from here.

Any way, don't take my word for it you can check out a research note from Edison (who have a 1665p price target) below or watch a video with their analyst talking about it here if that is of interest to you to help you do your own research.