Five stocks to watch in January
Fenner, a manufacturer of conveyor belts and smaller industrial components, says it should follow a tough year with a better one.
Fenner's larger but slightly less profitable Engineered Conveyor Solutions division is a leading supplier of conveyor belts to coal mining, power generation and industrial companies. Its Advanced Engineered Products division, meanwhile, makes seals used in heavy industrial equipment, belts for office equipment, hoses used in diesel engines, components for medical implants, and a wide range of polymer-based products.
Conveyor belts may sound as if they are heavy industrial plant, but in reality they're more like the ink in a printer. They need replacing periodically, requiring closer relationships with customers. To that end, Fenner manufactures in 15 plants located around the world; an investment that may give the company a competitive advantage. The Advanced Engineering Products division targets the oil and gas and healthcare industries, which Fenner perceives as high-growth industries.
Although Fenner has a strong position in niche markets, those markets are very sensitive to economic conditions. During the credit crunch, the company reduced its workforce by 20% Even so, profit more than halved.
Although Fenner's performance rebounded strongly, in the year ending August 2013 revenues and profits from conveyor belts fell, as slowing growth in China and low gas prices in the US both reduced demand for coal. A 1 per cent overall drop in turnover and 14% fall in profit is a reminder that Fenner's fortunes have been dependent on high commodity prices.
Investing in the shares when the earnings yield is 7% requires conviction that these circumstances will continue in the long term.
Having sold off one of its businesses, cake and bread maker Finsbury Food is emerging from a financial quagmire endured by recession and expansion.
It bakes cakes and breads for UK supermarkets and grocery chains. A large minority of sales come from its own brands – Memory Lane Cakes, Lightbody and Campbells Cake Company – or are baked by Finsbury under license from Disney, Nestlé, Thorntons, WeightWatchers and others.
Profits fell during the credit crunch and have since recovered, but the company's debt burden proved more persistent until it raised £3.8 million in a placing of shares in 2012 and sold its Free From brand for £21 million in February 2013.
The remaining brands comprise the UK's second-largest ambient (non-frozen) cake supplier, with Lightbody the largest supplier of celebration cakes.
Memory Lane Cakes is the leading baker 80 of supermarket own-label cake ranges.
Its speciality licensed bread brands are growing, as they tap into trends to reduce unhealthy ingredients and increase bread's nutritional value.
Return on capital in Finsbury's financial year ending in June 2013 was just 5%, a result that may be explained by supermarkets' legendary buying power.
The shares trade on an attractive earnings yield of 9%, but Finsbury's prospects are muted. Free From, which bakes gluten-free bread and snacks, was one of Finsbury Foods' more profitable brands, growing at 20% a year. Finsbury sold a good company to give itself options, but since the existing business isn't profitable enough to justify major expansion, new investment may well come in the form of more acquisitions.
That strategy has not been a winner for shareholders.
For 25 years, GeTech has collected and organised data that helps reveal the 5 structure beneath the Earth's surface to companies exploring for oil and gas. Now the investment is paying off.
GeTech maps small variations in acceleration due to gravity over the Earth's surface and variations in the Earth's magnetic field strength, to determine the distribution of mass and rock density.
These maps reveal geological structure that, with other data, helps companies evaluate the potential of a region to contain oil and gas. It increasingly licenses its library of data and analysis to oil and gas explorers through Globe, a geographical information system (GIS) containing the company's global gravity and magnetic data, models, analysis and other datasets, which it launched in 2012.
Globe is sponsored by 10 clients, up from five in year ending July 2012, and GeTech is extending Globe to broaden its scope.
GeTech is profitable and cash-rich. The big question is whether Globe transforms it from a niche business that does well when oil prices are high and exploration budgets are bountiful, into a company with sustainable growth prospects.
Globe's largest customers, the likes of BP, Eni, ExxonMobil, Royal Dutch Shell and Statoil, have research departments of their own, so customers can become competitors as well as collaborators in less buoyant times, when there is less work and they will be inclined to rely on in-house resources.
If GeTech is a growth stock, it's cheap on an earnings yield of 7% But profitability is probably dependent on sustained high oil prices, so while its near-term prospects are good, the long term is less certain.
Mini-animal feed manufacturer and food and fuel distribution conglomerate NWF is an example to companies that would grow by making small acquisitions and efficiencies.
NWF took its current form in 2007 when, in the face of economic uncertainty and indebtedness, the current chief executive shed the company's garden centres to focus on distribution. Its biggest division, NWF Fuels, distributes oil and earns the company 66 per cent of its revenues and 45 per cent of operating profit. At the other two divisions sales are lower but profitability is higher.
NWF Agriculture manufactures dairy, beef and sheep feeds. Boughey is a grocery distributor that consolidates loads from food producers and importers and ships them to supermarket distribution centres, mostly in the north west of England.
The company says NWF Agriculture feeds one in seven cows and is the second largest ruminant animal feed producer. NWF Fuels is the third biggest UK distributor and Boughey is market leader in the north west.
The year to May 2013 shows how a diversified business can perform well, even when parts of it are under pressure.
Profits halved at Boughey as the distributor was squeezed between producers facing cost pressures and supermarkets experiencing reduced demand. Although oil prices fell slightly last year, depressing revenues at NWF Fuels, a cold winter meant sales of higher-margin heating oil boosted profits.
NWF Agriculture also benefited from the cold weather, which reduced the quality and volume of silage and enabled the company to pass rising raw material costs on to farmers buying alternative feeds. Overall revenues fell 1%, but profits increased 50%
NWF is a prosaic company that might make a good investment – but the earnings component of its 7% earnings yield is high because conditions at its two biggest business were benign in 2013. It won't always be that way.
YouGov is such a well-known market research agency that it's easy to think it's a more established company than it is. In fact it is a young business that has suffered growing pains.
The company gathers information from the public using internet questionnaires, and sells it to businesses, political parties, governments and charities. It floated in 2005 with revenues 1/20th of today's, and built its reputation on accurate political polling and its business on custom research.
Increasingly it's emphasising syndicated data such as Omnibus and Brand Index. Omnibus earns the company about 13% of its revenues. It gives clients access to YouGov's online panel of respondents, allowing them to conduct short surveys and get rapid results.
BrandIndex tells clients, many of them famous brands, what people think of them and their competitors.
It's such a speculative investment, though, that it's hardly worth mentioning the earnings yield of 5%.
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%.