Five stocks to watch in December
Broking aeroplane charters is a cyclical business, but Air Partner's flexible approach to what it does, and how it does it, suggests it's poised to profit through the cycle. Two thirds of revenue comes from large commercial planes, typically Airbus and Boeing. Corporations use them to ferry people to product launches and conferences, football teams tour in them, and governments use them to shuttle humanitarian aid, politicians and royalty.
Smaller planes such as Learjets, introduced in 2005, are a growing segment. The company earns about a quarter of revenues from Learjet charters and its pre-paid JetCard, which guarantees a flight at 24-hours notice.
In 2008, at the height of its powers, Air Partner estimated it was the leading air charter company, but with only 1% of the global market. It trades on quality of service, its standing as the only aviation company to hold a Royal Warrant, and its 50-year history. Its reputation may give it sway over customers and the airlines that supply the planes, and by having a bigger network it can offer a wider selection of planes, at shorter notice, in more locations and more reliably.
Before 2008, Air Partner fattened up on government contracts, as adventurous foreign policies demanded the movement of personnel and aid around the world. As governments curbed their budgets, Air Partner switched its emphasis to private jets, holiday companies, and the oil and gas sector.
It has stabilised profitability, albeit at a lower level, a testament, perhaps, to its flexibility. By making staff redundant it has reduced its main cost, and by redirecting remaining employees to more prosperous markets it has increased their efficiency. The company has no debt and on the assumption that it is currently at a lowish point in the cycle, Air Partner's share price, which puts it on an earnings yield of 7%, looks quite good value.
Showing confidence in its successful email marketing software platform, dotDigital has ditched dotAgency, a website building and optimisation business, and plans to start paying a dividend. dotDigital sends marketing emails and conducts surveys for companies including BBC Worldwide, Crystal Palace Football Club, Help the Heroes and DHL. It charges a price per email for users of dotMailer, its main product.
The company has just undone a "diworseification" by winding down an unsuccessful website design agency acquired in 2011. Instead, it has opened a New York office and is investing in sales staff to make the most of dotMailer.
With an increasing number of large companies adopting the dotMailer platform on multi-year contracts, and turnover growing faster than the impressive growth of the UK email marketing industry over the last decade or so, this seems like a sensible strategy – especially as dotDigital is resoundingly profitable.
The new, simpler dotDigital is focused on doing one thing well. If the UK market continues growing and the company can replicate its success abroad, the shares may well be cheap. They currently trade on an earnings yield of 6% though, suggesting anticipation of modest growth.
Wetherspoon's unique management culture and increasing scale may give it a strong advantage over rival pub groups, as well as a defence against the competitive threat of cheap booze from supermarkets.
The company has built its reputation on selling good-quality food and beer at reasonable prices in distinctive, often cavernous venues. But behind the mission statement is a smooth operation, more reminiscent of the famous fast-food franchises and even supermarket chains with which it also competes, than of pub chains.
That may be because Wetherspoon manages all its pubs directly, rather than leasing some to tenant publicans. Under the leadership of founder Tim Wetherspoon, it has developed unique formats that, in the naming of the pubs and some of the beers they serve, embrace their localities, while providing a predictable Wetherspoon 350 service.
The pubs open for breakfast, for example, and serve coffee, ensuring they are busy more of the time.
One of the more dependable business expansions is the roll-out of a successful retail format, and Wetherspoon has grown relentlessly for more than three decades. In the process, its scale has delivered further advantages, enabling it to control costs by negotiating advantageous terms with suppliers. It's been an astute opener of pubs, too, slowing down as property prices increased before the credit crunch in 2008, and accelerating in the aftermath.
Tim Wetherspoon seems to fear competition from supermarkets most. But although they have even lower costs because they pay less VAT, their competition is more troublesome for less efficient pub chains – Wetherspoon's direct competitors. Although the company is reliant on debt to finance growth, profitability was untroubled through the recession. On an earnings yield of 5%, though, the shares are not obviously cheap.
Growth in turnover and profits have stalled at the flooring manufacturer, but the company's history of reliable growth and financial prudence impresses.
James Halstead manufactures and sells Polyfor vinyl flooring and other brands through distributors worldwide. Ultimately, it's destined for offices, homes, and often buildings with specialised requirements, such as schools, hospitals, sports centres, laboratories, shops and factories.
Some of its products meet exacting technical specifications, health and safety standards, or have other desirable characteristics. Acoustic flooring reduces the impact of noise, for example. Technical superiority may give James Halstead an advantage, but it's a competitive market, so any lead could be eroded without continuous innovation – or perhaps even with it.
That the company has a continuous record of innovation going back to the founding of Polyflor by James Halstead in 1915 is reassuring, but the company admits flooring is a commodity. Customers are influenced heavily by price, hence the dent in its record of growth this year as manufacturers drop prices to clear high levels of stock.
"It is a time to keep heads down and plough on, defending the position we have achieved," the current chief executive Mark Halstead says, as the company continues to invest without showing an immediate improvement in returns.
The company's objective is to profit in the long term, as it has for a long time, which makes it an attractive proposition. But it too is on an earnings yield of 5% and probably not in the buy zone.
The serial acquirer of small transport technology and service companies is valued at nearly three times the multiple it would pay for an acquisition.
Tracsis provides software, hardware and services to collect, report and analyse transport data. The company has grown by acquisition, the latest being a company called Sky High, which performs traffic surveys, counting pedestrians, rolling stock and vehicles for government bodies such as highway agencies and private companies such as railway operators and festival and conference organisers.
Tracsis's main customers are the UK transport operators, for instance Arriva, Stagecoach and National Express, as well as Network Rail, the Department for Transport, local authorities and large engineering and infrastructure companies.
It has acquired five companies since flotation in 2007, seeking stable, profitable companies that supply unique products or services it will be able to sell to its customers. The strategy seems to be working.
Tracsis has grown strongly while maintaining high returns on capital. The company claims Britain is leading in the development of "intelligent infrastructure" that it can export; it recently made its first software sales in New Zealand and already operates in Australia.
There are risks, though. The boost in turnover from the acquisition of Sky High masked a fall in turnover in the year to July 2013, and profits fell. Sky High doesn't seem to match its idealised profile for an acquisition; it made a modest profit last year and a loss the year before. The price too, is high.
On an earnings yield of 5% - equivalent to 21 times earnings, three times the multiple it prefers to pay for companies – Tracsis probably wouldn't acquire itself.
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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