Five stocks to watch in April
Amino Technologies is firmly in value territory. At 93.5p, the shares cost eight times adjusted 2013 profits, putting the company on an earn- ings yield of 13%. Amino designs and manufactures set-top boxes for broadband pay TV providers. Its biggest customers are in the US and the Netherlands.
In 2013, 55% of revenue came from three customers in those two countries; a 40% fall in Dutch revenues largely resulted from one company that stocked up in 2012 and is unlikely to order again until 2015. Nevertheless, Amino was still highly profitable.
Apart from the TV licence fee and by consuming advertising, people pay for TV in two ways: by signing up for content from broadband providers (IPTV, or Internet Protocol TV), or by join- ing services such as Netflix, which are delivered Over-The-Top (OTT, or over the open internet).
So Amino's customers have more to gain if IPTV prevails, but viewers want OTT services too, hence Amino builds OTT capabilities into set-top boxes.
Amino also wins if set-top boxes remain a popular way of accessing pay TV, but another contender is the Smart TV, which includes pay TV capabilities.
Amino is broadening its appeal by turning its set-top boxes into media and home automation hubs, and developing cheaper models for emerging markets.
Judging by the numbers, the shares are very attractive. Profits, though, which fell very marginally in 2013, are not predictable due to the rapidly changing industry and Amino's dependence on a few major customers.
Amino and ARM are both cash-rich technology companies based in Cambridge, but that's where the similarity ends. At £10.00, ARM shares cost about 64 times adjusted 2013 earnings, putting them on an earnings yield of just 2%. The shares are not cheap unless the company continues growing rapidly for a long time. That could happen.
Growth depends not only on the presence of ARM chip designs in 95% of smartphones, a market that in 2013 showed signs of slowing, but also on explosive growth in two other markets: internet servers and other networking equipment, and embedded devices and the so-called 'Internet of Things'.
ARM enabled the smartphone revolution by designing processors that do more using less energy. Performance is also critical in servers and embedded devices, because they're deployed in huge farms consuming vast amounts of energy.
Embedded devices may become ubiquitous, automating industry and homes, monitoring our health and making devices from watches to refrigerators 'smart'. ARM's model of developing superior designs and licensing them to manufacturers works. Chip manufacturers outsource design to ARM because it's cheaper, plus ARM designs for the whole industry, so it's better at it.
In 2012, 29% of 110 new licenses were for smartphone technologies, 25% for embedded applications and 17% for enterprise applications like servers. The company, which raised revenue and profit by more than 20% in 2013, is a challenge to any value investor. If it can repeat the success it has had with smartphones, growth will continue. But what price growth?
A share price of £4.80 values Brammer at approximately 22 times adjusted earnings, putting the company on an earnings yield of 5%. That implies growth – a reasonable prospect over the next few years, provided the UK and the rest of Europe continue recovering.
Revenue increased 2% in 2013, and profit 8%, although ominously the company's financial obligations increased too. But since Brammer's growth has, occasionally, gone into shuddering reverse, it cannot be taken for granted.
Brammer supplies components for maintenance, repair and overhaul (MRO) – traditionally bearings for production-line equipment and tools. The company benefits customers, principally pan-European manufacturers and food producers, by reducing the number of suppliers and therefore costs, and providing technical support. To service the Europe-wide operations of companies such as Siemens and Rolls-Royce, scale is important, and Brammer is the biggest pan-European MRO distributor.
The company's strategy depends on expansion. Its acquisitions have, in part, been funded by debt, which came back to haunt the company during the credit crunch, when profit contracted.
Since 2008, acquisitions have reduced in frequency, but Brammer's debt profile is worrying for a company prone to lapses in profitability.
Bunzl distributes everyday items that businesses and organisations need – a one-stop-shop for packaging, retail displays, gloves used in the preparation of food, cleaning and hygiene supplies, workwear, safety items, and basic medical consumables such as gloves, swabs, gowns and bandages.
As with Brammer, Bunzl allows customers to consolidate their sources of supply, save money and concentrate on business rather than, say, purchasing loo paper, which Bunzl can do for them. The company voraciously acquires small distributors around the world, from Australasia to South America.
Last year Bunzl acquired 11 companies at a cost of £295 million, the highest level of acquisitions since 2004 – which contrib- uted 10% of the 12% rise in revenues (assuming constant exchange rates).
Bunzl has been consolidating distributors for decades, and grown into a business with annual revenues of £6 billion that earns high and stable returns on capital and relentlessly increases profit. It has demonstrated the ability to survive recessions relatively unscathed, probably because it's more diversified than Brammer and supplies more mundane products, required by businesses even during recessions and downturns.
The company's record, bolstered in 2013 by a 14% rise in adjusted profit, must be what gives investors and traders the confidence to price Bunzl at £15.70. That's 20 times adjusted 2013 earnings and translates into an earnings yield of just 5% – even though Bunzl, like Brammer, carries hefty financial obligations.
When they say Britain doesn't do engineering any more, they forget about engines. Rolls-Royce is a world-leading manufacturer of gas turbines and piston engines that propel aeroplanes, boats and submarines, and generate power.
Although Rolls-Royce grew revenue 28% and profit 22% in 2013, the stock market responded adversely to its full-year results statement in which it fore- cast flat revenue and profit in 2014, mostly due to cuts in defence spending.
But military customers are not Rolls- Royce's biggest customers; civil aviation generated more than twice as much revenue in 2013 (43% of total revenue), and from 2015, the company expects a resumption of the growth investors have become used to. The sell-off means that at a price of £9.90, the shares cost 13 times adjusted 2013 earnings, putting it on an earnings yield of about 8%. That's probably good value for a company with Rolls-Royce's expertise and reputation.
The company focuses on what it calls the four Cs: customer, concentration, cost and cash. Focusing on the customer means developing the most efficient power systems and delivering them on time; and concentration - deciding what and what not to invest in – is the basis of its strategy.
Rolls-Royce's long history in engines probably gives it a technological advantage evident in its many patents. On cost, the company says there is more to do: it's reducing 'indirect headcount', moving production from high-cost countries, reducing the number of suppliers, and overhauling IT systems. Rolls-Royce is investing heavily, and although an estimated 174% increase in net debt looks bad, the company starts from a low base.
This feature was written for our sister publication Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
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