Richard Beddard reflects on the value for money on offer.
I have investigated three companies this month. As usual, this comes down to weighing up the quality of the businesses against their market values. None of these firms comes up short on quality, but in terms of value it is a different story.
For more than 10 years, growth in sales of disinfectant wipes, foams and sprays has confirmed the superiority of Tristel’s chlorine-dioxide chemistry for manually cleaning simple instruments in hospitals.
The year to June 2019 was no different. Tristel grew in the UK, where it is the dominant supplier in some outpatient departments. But the firm grew more abroad, where it won regulatory approval for dozens of products in 14 countries and where it now earns most of its revenue.
High profitability and the fact that Tristel has protected its disinfectants with a blizzard of patents breeds confidence in its future. In the US the firm is five years into a project to gain Food and Drug Administration approval, initially for Tristel Duo, a foam disinfectant.
Failure is always a possibility, and competitors eyeing Tristel’s fat profits may raise their game, but the firm appears to have a winning product and multiple opportunities to grow. Outside hospitals it is targeting community nurses.It also makes products for vets and scientists.
Nevertheless, Tristel scores a modest five out of 10 for its longterm investment potential, mostly because of its high stock market valuation (about 34 times profit on a debt-adjusted basis), but also because executive remuneration is tied to its share price, which therefore rewards the expectation of future profit as much as it does current achievements.
James Halsted also remains true to form. In the year to June 2019 it eked out an increase in revenue and profit, but remained prodigiously profitable by earning a return on capital of more than 30%. The firm’s consistent earning power is surprising, as it makes vinyl flooring, a mundane product mostly for the commercial market, which is prone to fluctuations in economic and construction activity.
The firm almost makes a fetish of the mundanity of its product, which typically floors unflashy places such as corridors. When money is tight for developers and landlords, though, they turn to the luxury end of the product range for use in the lobbies of smart buildings, in preference to wood, tile or slate. This, along with James Halsted’s focus on end customers, architects and other specifiers, may explain the firm’s success.
As with Tristel, however, James Halstead shares are not cheap. Adjusted for debt, they cost about 27 times profit on a debt-adjusted basis, so it too scores five out of 10.
Commercial lighting manufacturer FW Thorpe probably shares some customers with James Halstead. It also shares a strategy of keeping end customers, architects and other specifiers very close. FW Thorpe aims to make sales itself, rather than through a distributor, and (unlike James Halstead) it will usually deliver its products. Between these two events it tries to ensure its products are not substituted.
It is helped in this by the fact that it makes distinctive products as a result of waves of innovation, such as advances in wireless and LED technology, that have increased the complexity of lighting.
Unlike the other two companies in this month’s Share Watch, profit fell by 10% at FW Thorpe in the year to June 2019, although revenue nudged up. The firm has grown strongly for a decade as customers have rushed to retrofit LED lighting, because of the associated energy savings, but demand has peaked because of economic uncertainty.
That said, FW Thorpe remains highly profitable and probably the best value of the shares in this month’s Share Watch. It trades on a debt-adjusted price/earnings ratio of 20, earning it a score of 7.7 and a place in my favourite five.
Share Sleuth’s favourite five
|Score||Name||Description||Interactive Investor link|
|8.7||XP Power||Manufactures power adapters for industrial and healthcare equipment||http://bit.ly/swXPP2019|
|7.8||PZ Cussons||Manufactures personal care and beauty brands, in the main||ttps://bit.ly/swPZC2019|
|7.7||FW Thorpe||Makes light fittings for commercial and public buildings, roads and tunnels||http://bit.ly/swTFW2019|
|7.6||Solid State||Makes rugged computers, batteries and radios. Distributes components||http://bit.ly/swSOLI2019|
|7.5||Victrex||Manufactures PEEK, a tough, light and easy-to-manipulate polymer||http://bit.ly/swVCT2019|
Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value.