A brief in line update from this laundry and textile services company. They say their turnover is up 3% underlying with improved margins and strong cash flow as usual. However after the effects of currencies their reported turnover is expected to be down 3% in the period although they say that reported operating profits are expected to be flat in the period thanks to the margin improvement. Not a lot to add but the Company said :
"The Board continues to expect to achieve a year of good underlying progress in line with its previous expectations."
You can read the full statement by clicking the highlighted link above.
This leaves the shares looking fairly valued on around 15x with a yield of just over 3% so not too much to get excited about either in the business or with the share price, although having said that Mr. Market has marked them up by 2% or so first thing. You can read my previous pieces on it here, which give more background details, a previous half year update and why boring can nevertheless be brilliant for your portfolio (see chart below) .
However, it is worth remembering come the next recession that this one does have some cyclicality given its exposure to hotels (via linen services) and manufacturers (via work wear) which meant it did give back a lot of its gains in the last down turn in 2008.
I wrote up earlier in the year a piece on some liquidity research from Ibbotson et al which showed that using liquidity data could help to identify outperforming stocks by focussing on those that were less actively traded.
At the time I concluded that while it was interesting and potentially useful to investors and private investors in particular, I did not have a way to access or screen for the data. I suggested it to Stockopedia who seemed to suggest they might try and add it at some point in the future, although they are quite busy rolling out their service to global markets and as a result they are quite slow in delivering new promised features.
However, a service which I follow via a free e-mail now apparently offers a screen for their version of liquidity as part of their subscription based Quant Investor screener service. I have not tried it so I cannot comment on it, but it looks interesting as it offers the ability to screen over 22,000 stocks around the world from US, Europe and Asia if that is something you are interested in. You can check it out and get more details of their research and services by clicking the image below which demonstrates the out performance of illiquid stock in using the metric in their research.
I was trawling through a list of over sold stocks the other day on the look out for good quality value stocks and I came across Rolls Royce. Now this one has had a couple of profits warnings this year with the latest one coming this month and suggesting a flat outlook for next year. This in addition to the recent sell off in the broader market has left the shares looking over sold at 780 pence as you can see in the chart below. They last traded at these levels in 2012 and it looks as though these levels might provide some support. In addition they are due to start a £1 billion (6.8% of market cap) share buy back programme before the end of the year assuming the disposal of the Energy gas turbine and compressor business is completed as expected, so this should also provide some support to the share price. Gaps on the chart from the profits warnings this year leave some decent potential medium term upside targets at 900 pence and 1200 pence.
So what about the fundamentals - well eye balling these they show an erratic earnings trend in the medium term, which begs the question why is the market getting so upset about the recent set back in the short term? Aside from that they have grown the dividend steadily from 14.3 pence in 2008 to 22 pence in 2013 for a compound growth rate of 9% per annum over that period. However, I note that forecasts for the next two years show a slowing to 5 to 6% probably reflecting the steady downward trend in earnings forecasts for this year and the flat outlook for next year. Despite the earnings downgrades the forecast dividend of around 23 pence for this year is still expected to be covered around 2.8x by earnings.
In addition the company has cash on the balance sheet, some unique technology which should provide some sort of moat and barriers to entry. In addition to this in their recent update despite the short term difficulties they did upgrade their medium term forecasts to include the suggestion that Group Return on Sales could rise to 13.5% to 14.5%. This compares to a range of around 9 to 11% in recent years, so if this can be achieved it suggests there could be some upside to the valuation.
Talking of which the shares at these levels trade on around 12x with a 3% yield and as such look reasonable value for a good quality business with a solid balance sheet a a good track record of increasing dividends. So it could be an interesting long term buy down here as academics have noted that share prices tend to be more volatile than the underlying earnings, although the earnings here are certainly quite unpredictable in the short term. Nevertheless, I was also encouraged to see that Woodford Asset Management are planning to roll with it for the long run, so I'll be keeping a beady eye on it to see if it can soar again like a high flying bird. Of course it could continue to sink like a Led Zeppelin towards 500 pence to 600 pence if they have a third profits warning (quite common) or if economies and markets tank again and airlines etc. start going bust and cancelling / deferring orders again, but then I guess there would be plenty of other stocks in trouble if that comes to pass.
After my piece about markets last week looking at the technical picture I thought I would share with you some interesting pieces I have seen recently on dividends, downside levels in terms of valuations plus a macro piece on debt and deflation.
First up is the Quarterly Dividend Monitor from Capita which you can download by clicking the highlighted link. This looks at the prospects for dividends and the effects of currency moves so far this year. The image below is an interesting table from this document looking at the growth year on year from what they deem to cyclical and defensive sectors. Reasonably topical given the downgrade to Glaxo's dividend forecasts this week and given how much the top 10 stocks in the UK contribute to the overall income.
Hat tip for the above to John Kingham at UKValueInvestor.com as he shared a link to this report in his interesting piece entitled How Low can FTSE 100 go? He specialises in using CAPE 10 year earnings as the basis for his valuation screening and he applies this to FTSE as well as looking at possible dividend yields at various lower levels. Worth a read as he points out that:
"For example, at 5,000 the FTSE 100’s CAPE would be 10. If it fell to 4,000 then its CAPE would be 8 and at 3,500 its CAPE would be 7. Alternatively, you could look at dividend yields.
The Capita Dividend Monitor expects total FTSE 100 dividends in 2015 to be around £85 billion, which equates to approximately 201 index points.
If that were correct then at 5,000 the FTSE 100 would have a yield of 4%. That’s high, but not unfeasible high.
At 4,000 the large-cap index would be yielding 5% and at 3,500 it would be yielding 5.7%.
For some context, the market was yielding about 6% at the very bottom of the financial market crash in 2009."
However he does not factor in any decline in earnings or dividends if the fall was on the back of another slow down or recession but I guess as it is a 10 year average it shouldn't make too much difference to the above PE numbers but the yield support might turn out to be less. He offers a free weekly e-mail which can have some interesting stuff in it, otherwise it is a subscription based service based on his research which looks sensible enough although I can't say I have tried it. There is also a good article looking at similar things on the Daily Telegraph today too.
Next up is another John - John Mauldin who I have recommend in the past. If you have not signed up for his free weekly investment and economics e-mail called Thoughts from the Front line then I would highly recommend you do so at his website. Last weeks called the Flat Debt Society was particularly thought provoking and well worth reading if you have not seen it. It is particularly relevant as the Fed tries to withdraw QE and given the recent market reaction to that and other geo-political events. In particular the following quote from the piece was particularly worrying and may encourage you to read it or not as the case may be:
"When there is no inflation, the choices are between a deflationary boom and a deflationary
So on that bombshell I'll leave it for this week and hope you have a great weekend - don't worry be happy - I do believe that's a song - see the website for the video below if you are reading this on the e-mail. Ironically it not only features a man on a window ledge but also appears to feature a cameo appearance from Robin Williams, shame he didn't remember it.
I wrote this one up at the end of September as a Value idea you'll probably hate with a suggested price target of 180 pence and again after their recent results and deal with Amazon. The shares have now hit my price target for a return of around 20% since the end of September, what's not to like and not so much to hate after all!