Month End Update for January 2016.
So one of the worst starts to a year ever from equity markets around the world comes to a close with a sharp rally. This fall seems to have been caused or rationalized post event as being driven by fears of a global slowdown, especially in China and the effects it was having on commodity prices and in particular the oil price. In addition markets had been on a bull run for nearly seven years on the back of Central Bank support and as a result some markets, such as the US, had also got onto extended and historically high ratings.
Thus with the US Federal Reserve starting to tighten monetary policy in December it seems as though investors came into the New Year and suddenly feared that the Fed put may have been withdrawn and so like Wylie Coyote they suddenly looked down and had a panic attack.
Fast forward to the end of the month and we had a sharp rally seemingly on the back of the Japanese central bank introducing negative interest rates and some weak US growth numbers which probably firmed peoples expectations that the US Fed may now be one and done in terms of raising rates, rather than doing a series of rate rises this year, perhaps.
However, it does all beg the question of how dependent markets have become on central bank support as each time they try to start withdrawing it markets seem to have a fit. Thus I guess time will tell if the central banks have now blinked on the back of the markets sliding in January and if therefore this current sell off turns out to be another temporary affair or if it is the harbinger of something worse. Which brings me nicely onto a look at the monthly timing indicators and how the Compound Income Scores Portfolio has done in this difficult month.
A couple of stocks which are in the Compound Income Scores portfolio reported updates today. Firstly we had a trading update from W.H. Smiths (SMWH) covering the 20 weeks to the 16th January 2016 and the all important Christmas trading period. Once again these pleasantly surprised despite ones natural scepticism about their format. They saw total sales up by 4% and like for likes (LFL's) of +2% over this period with the travel business again leading the way with 12% growth overall and +5% LFL's. The high street business was essentially flat and apparently continued to benefit from what they describe as the "colour therapy phenomenon" (colouring books for adults). As a result of the strong sales performance in High Street over the 5 week Christmas period, they say they now expect profit growth for the year to be slightly ahead of plan.
So it is good that they are at least ahead of plan so no need for downgrades like some other retailers, but whether it is enough to see estimates edge up a few percent remains to be seen. Therefore using current forecast with the shares up 6% to 1685p this morning in a weak market leaves them on a fullish looking 18x with a 2.6% yield which both come off the back of forecast growth of around 10% currently. Meanwhile with this continued growth and some other good operating metrics they continue to score highly on the Compound Income Scores (CIS) with a score of 99 so it seems likely that they will continue to be held in the portfolio.
The other holding that has reported a year end trading, product and technology update is the £150m market cap. fire alarm manufacturer Sprue Aegis (SPRP). These were also suggesting a performance slightly ahead of forecasts with sales at £88.3m some 2.2% ahead of forecasts for example. Otherwise the statement was a bit mixed covering as it did a slow down in France in h2 after a strong boost from regulatory changes in the first half, while the UK saw a good pick up on new product launches into the trade. Meanwhile they highlighted a big negative effect from the strength of £ v € and weakness of the £ v $, although I note the first of these has gone in the opposite direction recently which may help them going forward if that is maintained or extends further. The other negative was that they flagged higher stock levels, as expected, as a precaution when they moved some production facilities to a new site last year. Despite this they did however flag that they expect to still have £22.4m of cash up from £15.9m last year demonstrating their cash generation.
On the outlook they struck a cautious tone and while they said they expect to trade in line with forecasts they see the results being heavily second half weighted, which then leaves them at risk of disappointing if things slip. This seems a risk as they flagged a delay in launching some products this year in the carbon monoxide and hard wired fire alarm sectors but at least they should boost next year now they are launched.
Talking of expectations, forecasts are for earnings to fall from this years expected 21 to 22p to around 17p - probably as the boost from the initial boost from French regulatory changes drops out.
On this basis at this mornings price of 328p (down 3%) they trade on a full looking 19.3x with a decent 3.65% yield on a forecast 12p dividend, +20% from this years expected 10p. However on my preferred EBIT to Enterprise Value metric they trade on a decent 9.4% yield on this metric adjusted for the £0.5m of share based cost that they flagged in the statement. As a result of this, the decent growing yield and quality operating metrics it continues to score well in the CIS coming in with a score of 96 and as such it will likely remain in the portfolio.
Summary & Conclusion
So a couple of reassuring updates form stocks in the portfolio which are therefore holds, but I note that the market is continuing its slide today as the bearish mood of the market from the start of this year continues. Therefore probably no rush to get out there buying unless you have lots of cash to invest as the market seems to be trying to break its lows of last summer. It may however be worth watching out for opportunities thrown up by indiscriminate or forced sellers but always do your own research first to make sure you are comfortable with what the company does and how it makes its money.
I say makes it money as I would not recommend buying blue sky loss makers or those that do not pay a dividend, although I know some do - each to their own I guess. By the same token if you are fully invested or geared even, then definitely worth looking through your holdings and making sure that you are happy to continue holding them for the long term and think about weeding out any flaky or weak holdings and especially zero yielders unless you are really confident about their future prospects being reflected in the share price at some point.
...as we have had a couple more updates from holdings in the portfolio. First up today we have had an Interim management statement for the 15 weeks to 11 October 2015 from Rank Group (RNK) which looks very good on the face of it. They have reported an 8% increase in like-for-like revenues for the period with total revenues increasing by 7%.
This seems to have been driven by 12% growth in total and LFL in the Grosvenor Casinos division. Mecca Bingo was ahead too but only by 1% total and 3% LFL. They say the growth in the Casinos division was driven by on line and London Casinos which augurs well for the roll out of their enhanced digital offering in Q1 2016. The growth in Mecca Bingo was apparently more balanced between venues and digital.
Steady as she goes here then as the full year revenue growth is forecast to be 8% and they seem broadly in line with that so far. Indeed on the outlook the Company said that the the Group's businesses continue to make progress in line with management's expectations and it remains confident in the Group's prospects for the year. Seems like a strong hold on a fullish looking 17x with a 2.4% yield and a CIS of 97 & a Stockopedia Rank of 96 - Bingo.
So it seems we are becoming a nation of gamblers as well as a nation of shop keepers, although personally I've never been in a Casino, apart from the Stock Market! Any way talking of shop keepers that brings me onto the other stock which reported today - the retailer W.H Smiths (SMWH). They reported full year results for the year to 31st August 2015. These are a bit of a conundrum because if you were starting out in business today you probably would not create it and it has been one of the most heavily shorted stocks in the UK market, although this is now at about 7% of the shares outstanding. Despite this as you can see from the chart at the end the shares continue to progress steadily.
As for the results these seem to be in line with forecasts with another 12 to 13% growth in the eps and dividends. This has again been driven by the travel business which saw 9% total revenue growth and 4% LFL. This helped to offset the on going decline in the high street stores which saw revenues decline by 4% in total and 3% LFL. They do however remain highly cash generative with £109m of free cash flow which has helped to fund the 13% increase in the dividend and another £50m share buy back programme. The high street stores also edge profits up on the back of more cost cutting.
So overall it seems like more of the same with shrinking high street stores delivering profits and cash flow on the back of on going cost cutting which helps to fund expansion in the travel business which benefits more from its captive audiences.
One has to wonder how much longer the cost cutting can go on and with recent publicity about retailers keeping VAT at airports and over charging at hospitals whether there could be regulatory intervention at some point on the travel side? Aside from that they shares also look fullish value on around 16.6x with a 2.8% yield for the year to August 2016. Despite this they still score well with a CIS of 98 and a Stockopedia Rank of 91, so on that basis they are likely to remain in the portfolio.
Finally in the portfolio I note that Maintel (MAI) has achieved the 800p level that I hoped they might achieve (where they now look over bought) when I reviewed their results.
A quick update for you today as there has been a bit more news around in the last couple of days since my note on Clarkson. Yesterday we had updates from Imperial Tobacco (IMT) who put out a 9 Month Interim Management Statement confirming they were trading in line with expectations and continued to be on track to deliver their 10% dividend growth target for the year. This will put it on a yield of around 4.75% for this year and it continues to look like an attractive income stock as it scores 90 on the Compound Income Scores (CIS).
Meanwhile in Insurance we also had interim results yesterday from Admiral (ADM) which edged up its chunky dividend by 3% as UK car insurance profits increased and overseas start up losses reduced. Their comparison business did however see a decline into loss put down to lower profits from confused.com in the UK and increased investment in overseas sites. This ones offers an excellent 6% yield thanks to their shareholder friendly approach of paying speical dividends to return surplus capital not required by regulations or to fund the growth of the business. Consequently it does not look so good on traditional dividend cover and balance sheet metrics and therefore only scores 52 on the CIS but nevertheless I think it is a good operator in this area.
Today we have had a couple of updates from stocks which feature in the Compound Income Scores Portfolio. Firstly WH Smiths (SMWH) had a pre close trading update in which they said that they expect their full year results to be slightly ahead of the consensus of analysts' expectations, which is nice. This one continues to confound expectations as they manage the decline of the high street business and the travel side continues to go from strength to strength and continues to expand.
Finally Rank Group (RNK) had some final results today which look very strong as UK punters appetite for gambling seems to be showing no signs of diminishing. Thus they beat forecasts across the board with turnover +4% to £738.3m v £731.7m, earnings +18% to 14.6p v 14.3p and the all important dividend +24% to 5.6p v 5.25p for a 6.66% beat although it was achieved via a reduction in cover from 2.8x to 2.6x which is still fine.
They saw growth in both the casino and bingo venues as well as on line despite the the introduction of Remote Gaming Duty from 1 December 2014, so a good result all round. They also flagged strong cash flow which allowed them to pay down debt too. On the outlook the suggest these strong trends have continued into this year and that they expect to launch a new online platform early next year.
The shares, before any upgrades post these numbers currently stand on a fullish looking 17x with a 2.5% yield for the current year to June 2016 and they still score well on the CIS with a score of 91. So I wouldn't put you off as the business seems to be trading well and the shares have momentum (see chart below), but I'm kicking myself for not buying them personally when I looked at them under 200p. So I'm reluctant to chase them up here (anchoring in action ?) but given the score the CIS portfolio will continue to run them, place your bets.
...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.