...as today we have had final results from Persimmon (PSN), a fruit and one of the largest UK house builders. As with other house builders these are strong, as one would expect, so I won't dwell on the detail for which I suggest you look into the full announcement at their investor website. On the income front worth noting though that they boosted their planned return of capital under their plan to 110p again this year and they boosted the extent of this further by suggesting a similar level of returns for the next five years too. At this mornings price of around 2050p this would give a decent yield of 5.4%.
While on the earnings front the 173p seemed to well ahead of forecasts and close to the 176p currently forecast for the coming year. So I presume we could see some upgrades to earnings and dividend forecasts on the back of these numbers. However, this may be required to keep the shares going as others in the sector have been weak and this one looks a bit expensive on a PE of 11.6x before any upgrades and they are not far off resistance from their highs last September. Thus I probably wouldn't chase it up here and if you wanted a house builder the higher scoring stocks in the sector on the Compound Income Scores are Bellway (BWY), which is in the Compound Income Scores Portfolio and the lower yielding Inland Homes (INL) if you are not so worried about income.
Meanwhile amongst a flood of other announcements and dividend cuts from BHP Billiton (BLT), Ladbrokes (LAD), and Standard Chartered (STAN) I've seen a 22.6% increase in my dividend from Provident Financial Group (PFG) which was about 2% better than forecast. This non standard lender continues to do well on the back of restructuring their home collected credit business, the acquisition of car loan business Money Barn and growth in their Vanquis bank business which includes a credit card operation too. The shares have however factored much of this growth in as they have doubled in the last two years to their current 3300p or so and now trade on a PE of around 18x with a yield of 4% for the current year on the back of a further 10% growth. Thus they seem fairly fully valued to me although they did trade up to 3600p recently. They are probably a strong hold though for income and growth as they continue to fund their dividend and growth from internally generated capital, including their latest venture into on line loans under the Satsuma brand.
..good things can happen to the value of your investment. Today we had a half year report from Provident Financial (PFG) the home collected credit, on line loan, car finance and sub prime credit card provider which has a market capitalization of over £4bn and is therefore a member of the FTSE 250. The results today, as they have in recent periods, showed very strong growth with adjusted earnings up by 30% which was ahead of forecast growth of around 22% for the full year. The dividend was up by 15% which compares with full year forecast growth of nearer 19%, but I suspect they will make this up when they announce the finals.
All parts of the business seem to be delivering and are seeing good credit quality so they are therefore confident of delivering good quality growth for 2015 as a whole. However, as I wrote last time when the shares were over £30 they are starting to look more expensive these days on nearly 19x with a sub 4% yield. This compares to the 13 to 14x and 5%+ yield they were on in early 2014 when I first highlighted them and got into this one.
Thus as I said in the title of this piece when a value stock becomes a momentum stock good things can happen to the value of your investment - mine has nearly doubled here for example. Now some of that reflects the re-rating from 14 to 19x but also the fact that they have delivered better than expected growth as momentum in the business and management action have accelerated growth and shareholder returns. On the current rating, which is probably justified by the current strong growth forecasts of 10 to 20% for the next couple of years, they have become more of a growth / momentum play from here.
Summary & Conclusion
Another good set of results which help to support current growth forecasts, could lead to upgrades and also help to support the currently high rating the shares stand on. However, as a result of the the rating it is extremely unlikely the shares will double again in the next 18 months in the same way they have just done as a further re-rating seems unlikely to my mind.
Nevertheless the strong growth forecast averaging about 15% over the next couple of years together with the near 4% yield could still give total returns approaching 20% per annum, assuming they can at least maintain the current rating.
So a hold I would say if you are in them, but be aware that you are now relying on the growth and momentum continuing, as if it doesn't then you may run the risk of not getting the growth you expect and being hit with a de-rating which is always the risk with higher rated stocks which are expected to grow strongly. This is the opposite to value / cheaper stocks which are generally expected to grow more slowly so if they disappoint the rating can take the strain more easily and if they surprise on the upside then good things can happen to the value of your investment as we have seen with Provident.
Provident Financial (PFG) - put out a positive looking Interim Management Statement today. This is one I have written up in the past. It seems growth has continued to be strong and credit quality has been maintained or improved and margins are up on the home collected credit side as they shrink the customer base.
The shares are now over £30 and are starting to look expensive on over 19x with a sub 4% yield now, so I wouldn't suggest chasing them up here as they are also close to being over bought. However, they seem to be growing strongly and have good momentum as they are reinvesting to grow the new Satsuma on line loan business. Thus it is probably worth sticking with for now, plus they are still cum the final dividend of 63.9p. However it does make the similar but smaller S & U (SUS) look much better value on just over 11x with a 3.6% yield with a similar growth profile and lower gearing.
If you want to find out more about their strategy then I suggest you download the presentation from their recent Investor & analyst day.
...as it has been a busy day for results today. Most of these I have covered recently when they announced year end trading updates so I'll just give brief comments today.
Firstly was Provident Financial (PFG) - the home credit and sub prime credit and instalment lender (click the name for previous posts or see the categories list at the side of the blog). They reported results which were probably just shy of best expectations with the dividend at 98 pence rather than 99 pence forecast, but then it was up by 15.3% which was better than expected at the start of the year. Thus not surprised to see the shares off a little first thing as they have had a great run and only look about average value albeit with a decent and strongly growing yield of around 4% which remains the main attraction of this one. The only real point of note is that I see they are scrapping their Polish Credit card pilot at little cost this year having seen start up losses of £10m there last year - so a small boost there.
Next onto boxes and firstly the cardboard variety as manufactured by Mondi (MNDI) amongst other things. In contrast to PFG their numbers seemed to be slightly ahead of expectations at the earnings level and as such the share have responded positively first thing. I note the dividend was perhaps 1c light of forecasts but was nevertheless up by 17% and well covered by earnings and cash flow. This one is obviously sensitive to general economic conditions (cyclical) and they say that the outlook for this to remain below average. They are also affected by exchange rate moves but these have tended to help them recently. They summed up by saying "Furthermore, the recently completed capital investments and ongoing projects should contribute meaningfully to our performance going forward. As such, we are confident of making further progress in the year ahead." The only other point I noted was that they flagged a little extra cost from planned outages this year which are expected to total €80m versus €55m last year. The shares have done well in the last year out performing by around 20% and they have re-rated somewhat as a result. Thus they look less compelling on around 15 to 16x next years earnings with a 2.7% yield, before any changes on the back of these numbers. The latest declared operating margin also leaves it on a fairish 7% earnings yield. Consequently the CI score has drifted back into the 60's as the shares have re-rated and as such they look like a hold up here and if you hold them I would suggest you need to keep an eye on economic developements for signs of weakness / recession emerging given their cyclicality.
Persimmon (PSN) was the other box provider that reported today and as expected reported very strong results and a welcome early payment (April rather than July) of this years planned return of capital of 95 pence. The problem here is that the share had travelled well before today's numbers so probably not surprising to see some profit taking as perhaps people think this might be as good as it gets perhaps. They are however committed to further capital returns over the next few years, although next years is only currently expected to be 10 pence, although this could be upgraded.
So with a fullish looking (for a house builder) PE of nearly 12x this years earnings and more limited yield support given the lower return of capital planned for next year I can see whey people would be taking profit up here ahead of the General Election uncertainty. Despite this the company say the year has started well and they still seem well place to prosper in the medium term so as I always say you pay your money and take your choice.
Finally digging deep into my reserves of endurance and as the coffee pot beckons just a quick mention for BHP Billiton (BLT) which reported half year results today. Not being a mining analyst I'll not get into analysing or debating the various possibilities for commodity prices. But in passing I note that they still expect an average investment return of greater than 20% for their portfolio of high-quality development options. In addition they say they expect to maintain or not "re-based" as corporates like to say these days, the dividend even after the planned demerger. This suggests that the 5%+ yield is safe for now but I note that earnings have been downgraded steadily in recent months and the cover is diminishing and will diminish further post the demerger. So if economies and commodity prices continue to struggle then this dividend could come under pressure in the medium term.
...amongst other things today. As there are lots of announcements I'll try and keep it brief. First up on the topic of money is a year end trading update from a stock I covered last year called Provident Financial (PFG) who describe themselves on their website as providing simple, manageable financial services for people whose needs are not always met on the high street. When I first wrote it up / bought it back in January 2014 it was offering a yield of 5% with 10% expected dividend growth.
Today they have updated on the year to 31st December 2014 and the unfortunately named Peter Crook commented:
"I am pleased that the group is expected to report 2014 results in line with market expectations. Vanquis Bank and CCD have both traded well through the final quarter of the year and Moneybarn has made a very good start under the group's ownership. Our funding position remains strong."
Within this they saw continued growth on the Vanquis Bank / credit card side as they manage the consumer side for cash while also modernising it and cutting costs. Against that they have started an on line lending operation called Satsuma and invested £10 million in a new credit card operation in Poland and bought a car finance business (Moneybarn), so quite a busy year.
Thus one would expect that they should hit current forecasts of around 130 pence of earnings and 98 pence or so of dividend, although I guess they could be tempted to round that up to 100 pence if they are feeling flush. This would actually represent 15%+ dividend growth compared to the 10% which was expected at the start of the year. This reflects steady upgrades to earnings through the year which is something I look for in my scoring system. A similar rate of growth (15%) is now also expected for the current year ending 31st December 2015 which after a 50% rise in the share price in the last year, leaves it on a fullish looking rating of around 17x with a still useful 4.5% yield as the shares have been re-rated somewhat. This leaves them just in the second quintile of my scores, so I wouldn't chase them up here, perhaps one to consider on weakness if you are not in it, but otherwise I'm happy to hold for now for the yield and the on going growth as the management continue to reshape the business.
Next up is newspapers as Connect (CNCT) the distribution group has also announced a trading update today at the 19 week stage. This is one I wrote up last year as a value idea and I traded it successfully. In their statement they said they had traded "broadly in line with management expectations". I am never that keen on seeing this phrase as I always take it to mean slightly below what we had hoped before but not dramatically so. The divisions including newspaper and books were all a bit mixed and total group revenue fell by 1.5% over the year.
They did an acquisition towards the end of last year as they continue to try and use the cash flow from the declining newspaper distribution business to diversify the business. It look good value on around 8x with a 6% yield for the current year to August 2015, although given the broadly in line comment I guess their could be some small downgrades. In addition the momentum is terrible on this one as you can see from the chart below and there is a gap to potentially close around 130 pence which, if they get down there, might leave them over sold and make a good entry point for a trade.
I say trade, which is not my main modus operandi, but I use it here because although it is cheap it can be dangerous to invest in businesses facing serious decline in their core business. in deed it puts me in mind of HMV and how they got into staging concerts to diversify into a related business and started selling all sorts of stuff in their stores. As we know that did not end well, although here they do have quite a few contracts extending out for 5 years for newspaper distribution which gives some reassurance for now.
it seems good value, top decile for value and overall on my scores, but oversold with poor price momentum and not without its risks as they try to manage the decline and diversify. So the success or otherwise of the diversification will need watching closely and could be the key to unlocking a re-rating.