Thursday, January 3, 2013

Thu 3 Jan - NXT, TED, DLC, SNCL

Interesting RNSs are starting to appear again at long last, and should build into a tidal wave of trading statements over the next couple of weeks, especially from retailers (which I take a particular interest in, as I spent 8 years as the FD for a ladieswear chain).

Fashion bellwether, Next (NXT) is the first fashion retailer to report. I so admire this business, both as an analyst, and as a customer. They just execute consistently well, at everything. Even their trading statements are a model of clarity, giving precise profit & EPS guidance (if they do it, why can't everyone? I often hear company management say, "we can't give forecasts, that's your job", at analyst meetings. My answer from now on will be, "well, Next give precise forecasts to the market, so why can't you?!"). We're only talking about current year forecasts here of course, not future years.

There are no surprises within the Next figures, just slight out-performance against previous guidance, and the trend of Next Directory growing strongly has continued, with sales growth year to date of 10.5%, versus only 0.6% sales growth in Next retail.

They see the outlook as "subdued but steady". Interestingly, Next buys back a hefty chunk of its own shares each year, so a hidden benefit in that EPS has risen in spectacular fashion over the years. It's a clever strategy that has helped drive a remarkable share price performance. As usual, I can't bring myself to buy the shares now that they have already risen so much. The fwd PER is 13.5, which looks about right.

Ted Baker (TED) announce that their trading statement will be issued next week, on Wed 9 Jan.

CAD/CAM software company, Delcam (DLC) puts out a strong trading update, indicating that they finished the year with record orders, saying that they have, "ended an already strong year on a new high". Impressive stuff!

It's always pleasing to see a British company succeeding out there on an international level. The shares have reacted positively, as you would expect, and have punched through 1000p. The PER is getting close to 20, so it's a bit warm for me, but I can see the attraction for growth investors who believe that the growth will continue.

Trouble is with toppy ratings, you're only ever one profit warning away from losing your shirt, which makes it difficult to sleep at night. Personally I'd rather look at fundamentally good companies which have had a temporary slip-up, and are priced for failure, but go on to recover. But each to their own!

Horticultural products group, William Sinclair (SNCL) had a lousy year in 2012, due to the exceptionally wet weather, which hampered harvesting of peat. This more or less wiped out profits for the year, which fell over 90% to just £261k. It's got debt, and a significant pension fund deficit of £13m (compared with £20m mkt cap), and isn't particularly cheap on a PER basis, even if you look at a more normal prior year's trading, so I won't be following up on this one. Too messy.

On a final point, I'm doing another little thing for charity, this time it's Cancer Research's "DryAthlon". The idea is that you don't drink any alcohol for the whole of January, and instead you donate the money you save to Cancer Research. What a great idea! And you can get people to sponsor you too. It is still open for new joiners, so if you fancy having a dry January & helping charity at the same time, then why not sign up?!

I've already tapped my friends here for sponsorship to my Half Marathon on Feb 17th, so am not expecting any more donations to the DryAthlon, but if anyone does feel like giving me a bit of encouragement for a dry January, then my Cancer Research fund-raising page for DryAthlon is here. Why not donate a virtual pint (of diet coke!)?!

Incidentally, my training runs were going very well, got up to 10 miles just before Xmas (although the last 3 miles of that were hobbling/walking/spurts of jogging), but the effects of Xmas food & booze, and a Cold, mean that there's still a lot of work to do. But I went back outside yesterday evening, and managed 4 miles, so am getting back into my stride. Will keep you updated.
A dodgy right ankle is the main problem, rather than stamina (I badly sprained my ankle in April 2012, and it's not fully recovered unfortunately, so seizes up when I run on it). But we'll get there, where there's a will, there's a way!

We're back to daily reports here now, so do check back here every trading day from now on, should be a very busy month for trading statements, then we'll start to get into the mega-busy period of Feb-Mar for 31 Dec year-ends.

Regards, Paul.

(Paul does NOT hold shares in any of the companies mentioned today)


  1. Hey Paul. Bonne Annee firstly.
    Here is a question for you. There are companies which are excellent in execution eg. Amazon. There are others which excel in having patented technology that makes their competitors envious eg. Dyson. I have been looking for companies that do or have both. For these I would be prepared to sell my house, my wife's jewellery and my kiddies pocket money and invest to the hilt.
    Have you come across any in your journey? Or I am just dreaming?
    Best. Ram

    1. Hi Ram, I'm no Paul (but am really grateful he exists and shares his wisdom with us). Have you thought about ARM? Innovative, a global player, well run and it keeps on giving (sadly I sold out of it too far back...) Perhaps that company comes close to fitting your bill?

      Happy searching

    2. Hi Jane. ARM certainly qualifies on the technology side. It's risk based chips are used by a number of leading mobile and computer makers. I have no knowledge of how well and tight their management is but on past performance it must be good. So far so good. The problem is that the price today is above 800 highest in over 12 months. All it requires is a sneeze and it will drop significantly. So yes I will wait a while and hopefully catch it when the price looks more sensible. The fact that it is an anagram of my name does not come into it :))

    3. Hi Ram,

      Trouble is, if you want a company that has some Patented technology that's taking off, and is executing well, then you have to pay through the nose for it (i.e. very high PER). So it's then only one profits warning away from a 30-50% crash, and most companies have bumps in the road at some point, often frequently, that's just how business is - something the markets often forget.

      So I tend to look for fundamentally sound companies that have hit a bump in the road, and can be bought cheaply for a recovery, rather than paying up-front for momentary perfection.

      Overall, I'm coming round to the view that good execution is everything - even if your products are inferior, or good but easy to copy, if you market them well, and do everything else well, then you win market share.
      Equally the stock market is littered with the remains of companies that had great technology, with great potential, but couldn't make it work commercially, due to sub-par management.
      There is often tremendous inertia in getting new technology to be accepted by customers, even if its benefits are great.

      Cheers, Paul.

  2. Hi Paul - You have a good point. Excellence in execution is better than having a patented technology that has huge potential. Witness Asos as a recent example. I have recently bought into Plexus. They have a patented technology for controlling well heads and all major oil companies are seriously evaluating it. However I went in last week and missed the huge price rise since July last year. Which is your point, if there is such a company that has both great management and patented technology then the chances are it is riding on a huge PE with practically no earnings to show yet.
    Regards, Ram

  3. Hi Ram and Paul,

    I suppose Carclo, much favoured over 3 years or so by David Schwartz in the FT, also comes under that umbrella of innovative technology, riding high with all kinds of potential pitfalls and even competitors ahead. I bought it in what turned out to be a momentum play, it zoomed up from the 200s to 500s and I panicked when it suddenly dropped in the middle of 2012, and sold out almost at the bottom (but still making a good 20%) only to watch it struggle to its feet and gallop on, but no longer with my money on its back.

    I know what you mean Paul about preferring the peace of the undervalued stock rather than the stress and hurly-burly of the momentum trade. You're making me reconsider some of my highly (over?) valued shares.....(GB Group?)

    Talking about buying good companies that have been overly jumped on - have you looked at SDL?

    Thanks so much for your blog - you're teaching me to think not merely act!

    1. Hi Jane,

      Glad you find my Blog useful!

      If a stock in my portfolio has gone up a lot, I tend to top-slice the position, selling around a quarter, in order to lock in the gains & free up some fresh capital for something else.

      If the price has become fully, or close to fully valued, then I sell out completely, even if it is in a strong up-trend (e.g. I sold HOME and TNI) too early, and missed out on further gains.

      However I prefer to recycle the money into something that HASN'T moved up yet, and is better value.
      There are some good opportunities out there currently in that regard, e.g. VNET, which has been held back by a large seller (New Solera Holdings) feeding stock into the market every day, so price static. However, the fundamentals justify a catch-up re-rating of 30-50%, to bring it in line with other small caps, which have had a very strong 6 months typically.

      DYOR as usual!

      Cheers, Paul.

  4. Wise counsel. Thank you Paul & Jane.