Richard Beddard rates three contenders for his favourite five list.
Over the long term, companies investing for future growth should earn higher returns than firms returning most of their profit to shareholders. Thinking 10 years ahead as usual, I prefer innovative Renishaw and Goodwin to conservative Colefax.
I recently ejected Colefax from the Share Sleuth portfolio (see previous page). Though the company believes it can grow, it has not grown convincingly for a long time. Revenue and profit remain stubbornly around their pre-financial crisis highs over 10 years ago.
In retrospect, that is not particularly surprising. The early noughties were go-go years for the high-end property market, and Colefax owns a number of posh fabric brands including the eponymous Colefax & Fowler. When people buy property they tend to redecorate, but the UK market has been stymied by an increase in stamp duty and worries about the impact of Brexit on the economy and house prices.
The US, Colefax’s biggest market, is experiencing its longest-ever period of economic growth, but we cannot rely on it making up for falling sales elsewhere forever. In Europe, Colefax’s third major market, the possibility of a hard Brexit is a concern because of the potential for tariffs on imports as well as exports. Colefax imports much of its fabric from Italy.
The company refreshes its patterns annually to keep people interested, but otherwise invests little. It has not launched a new range or bought a smaller rival for decades; instead it uses surplus cash to buy back shares, increasing the value of remaining shareholders’ holdings. This conservative policy has yielded decent enough returns, but better returns are probably available from companies investing to grow – Renishaw and Goodwin, for example.
Shareholders must be used to whiplash from movements in Renishaw’s share price. Over the last year and a half the direction has mostly been down, which has made the shares in a good business cheaper.
Renishaw operates in a capricious market, supplying equipment to manufacturers that automates production and quality control. Demand for Renishaw probes and gauges varies dramatically, depending on demand for the products its customers make – most notably smartphones, a maturing market.
Few manufacturing sectors do not benefit from Renishaw’s technology, though, and it has made big investments in 3D printing and surgical robots. Strong sales of 3D printing machines in the year to June 2019 and the second year running of profitability in its fledgling healthcare division suggest it is making good progress commercialising its ambitious new technologies, but an overall fall in revenue of 6% and a 34% reduction in profit are driving market sentiment.
Sadly, Renishaw still trades on a heady debtadjusted multiple of 34 times adjusted profit in 2019, but this is a share to watch.
Engineering business Goodwin, on the other hand, is valued at a more modest multiple of 19 times adjusted profit, which is probably as high as it is because traders anticipate a recovery.
The most eye-catching statement in Goodwin’s annual report for the year ending April 2019 is the revelation that in the first three months of the new financial year – May, June and July – the company took in £93 million in new orders, taking the total value of the order book to £165 million, 94% higher than a year ago.
If these orders lift revenue and profit back towards the levels Goodwin achieved before 2015, when the oil price crashed, it will be the result of fundamental changes in its mechanical engineering business, as well as the collapse of the principal rival to its refractory engineering businesses, which supply consumables like casting powder to the jewellery and tyre industries.
Goodwin appears to have weaned the mechanical engineering division off its dependency on oil explorers and producers by increasing the capacity of its foundry so it can make gargantuan steel casts, and by winning big orders in the US.
I score it 7.2 out of 10, which probably means it is a good long-term investment – although it’s not quite sufficient to win a place in my favourite five.
Share Watch favourite five
|Score||Name||Description||Interactive Investor link|
|9.2||XP Power||Manufactures power adapters for industrial and healthcare equipment||http://bit.ly/swXPP2019|
|8.1||Victrex||Manufactures PEEK, a tough, light and easy to manipulate polymer||http://bit.ly/swVCT2019|
|7.8||Howden Joinery||Supplies kitchens to small builders||http://bit.ly/swHWDN2019|
|7.8||Dart||Flies holidaymakers to Europe. Trucks fruit and veg around the UK||http://bit.ly/swDTG2019|
|7.5||FW Thorpe||Makes light fittings for commercial and public buildings, roads and tunnels||http://bit.ly/swTFW2019|
Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value.