Value Stock Beats Forecasts & gets upgrades...

...which is usually a good thing. The stock concerned is one that I have written up in the past called Connect Group (CNCT) which was formerly Smiths News, the newspaper distribution business which was spun out of W.H.Smiths. In brief their results today were ahead of forecasts in terms of turnover £1875.1m v £1859m, while eps was 19.7p v 18p forecast for this year and 18.7p for the year to August 2016, so they seem to have also beaten next years forecasts this year. On the dividend front they also pleasantly surprised with 9.2p v 9p forecast.

The beat seems to have been driven by cost savings in the News division and a useful first time contribution from last years major acquisition of Tuffnells which delivers odd shaped or outsized parcels. This benefited from more new business and margin improvements on the back of increased prices. Meanwhile their click & connect Pass My Parcel delivery service signed up 3,000 stores and is looking to double this number over the next couple of years with a further £2-3m of investment as a result. The News and Media division saw turnover and profits decline which they claim would have been up if it had not been for a boost from last years World Cup sales - which seems odd but that's what they say. The books division did however progress profits under new management as margins increased on lower sales and they saw a strong h2.

The balance sheet is pretty weak in terms of assets on this one which may put some off. It is also more leveraged now after the acquisition last year. On this they say debt should be at a peak at 1.9x adjusted EBITDA which is OK but leaves little margin for error. However having said that as this one is fairly cash generative, then you should expect this to reduce going forward assuming they don't make any more acquisitions.

Summary & Conclusion
So a good set of numbers and means that upgrades are likely on this one as they have beaten next years number and I hear that one broker, W.H. Ireland, is upgrading their higher than consensus number of 19.3p to 19.7p, although that  only matches what they reported this year so may well prove to be conservative. Indeed it is often the case that you get a series of upgrades as analysts tend to be too cautious in changing their numbers on the back of new information.

Any way taking that number for now to be conservative and assuming they edge the dividend up again in a progressive fashion to say 9.5p, at this mornings price of around 155p (+5%) would leave them on around 7.9x with a 6.1% yield, which is cheap, but then this is a lowish quality business which is leveraged and trying to offset by diversification a decline in its core business which is not always a recipe for success. It is also quite a similar rating to another business operating in a similar fashion called DX Group which came to the market recently via VC's.

So clearly the market is also pretty sceptical about these businesses, but therein maybe lies the opportunity if you are prepared to take the risk. The broker mentioned above has a 200p price target on the back of their upgraded numbers which would equate to more like 10x and a 4.75% yield, which doesn't seem outside the realms of possibility as the highs and lows for PE and yield on this one have been 10x+ and a bit below 5%. While on the chart I see the shares were at those kind of levels as recently as January 2014, but have struggled to get much above 170p in the last 12 months.

On that basis I would probably pencil in a short term target of 170p for a 10% capital return before resistance potentially kicks in. Beyond that if it can break above that level and out of it recent trading range then that could suggest a 200p - 210p medium term target for a 30%+ return. That may though require the patience of a saint, but at least you would be getting paid 6% or so while you waited. It scores reasonably well on the Compound Income Scores at 72 although I note the financial security score is weak which I mentioned above.

I have traded it successfully in the past, but I'm not sure I can raise the enthusiasm for it myself at this stage as I'm not that desperate for income and I prefer to target better quality stocks, but as I always say you pay your money and take your choice and this one seems fine if you should choose to buy it, but obviously do your own research as no guarantees etc.

Finally I've been experimenting with a larger font in the last few blog posts, any thoughts positive or negative on that - I assume it's easier to read or is it bad on phones as it means more scrolling? Any feed back would be gratefully received, thanks.