Five stocks to watch in November


Abcam manufactures and distributes protein research kits to scientific researchers; the proteins and associated products and datasheets help scientists study cells. In recent years rapid growth has slowed: in the year to 30 June 2014, Abcam reported revenue growth of just 5% and adjusted profit growth of 3% because of austerity in the US and Europe, which has constrained government funding of research.

But the market, which Abcam helped create, is also maturing.

A share price of 405p values the enterprise at about £780 million, about 21 times adjusted Revenue Profit Net debt profit. An earnings yield of only 5% is offputting because it doesn't imply much of a return unless the company grows strongly.

That presents investors looking at the latest set of accounts with a conundrum, because the company itself is in a position to grow strongly. Abcam earns a return on capital of maybe 30-50%. It converts almost all of that accounting profit to cash.

Unsurprisingly it has no debt.

The question is whether putative advantages, such as its network of suppliers and the quality of the data it has amassed on each of the proteins it markets, are a sufficient bulwark in an increasingly competitive market. At the current valuation, they would have to be.


Cohort reported full-year results to 30 April 2014 in June. The company engineers defence technology and provides consultancy to armed forces in the UK and overseas. Since the year end, when it posted a 1% rise in revenue and a 5% rise in adjusted profit, Cohort has confirmed its acquisition of Marlborough Communications earlier in the year, and a subsequent acquisition in October, J+S, should immediately improve profit.

Short-term, Cohort's prospects seem reasonable. Long-term they do too. While defence spending in the UK remains under pressure, Cohort is a specialist in electronic warfare and other technologies more likely to be in demand while governments are unwilling to put troops on the ground.

A share price of just over 213p values the enterprise at just under £80 million, or about 12 times adjusted profit. The earnings yield is 8%.

Cohort's probably good value, but the company is susceptible to external pressures, principally from important customers such as the Ministry of Defence. Maybe because its four subsidiaries are semi-autonomous they have occasionally misbehaved, let costs run out of control and taken on unprofitable work, with- out senior management noticing. Nevertheless, it has remained resolutely profitable through difficult times for the defence industry.


It's a good sign when a company has the confidence to explain itself. Dechra Pharmaceuticals' annual report is exemplary. The company, which reported full year results for the year to 30 June in September, has some explaining to do, though. It has, through acquisition and disposal, changed course.

A specialist in pet pharmaceuticals, Dechra has its sights set on the global food-producing animal market too, which through the acquisition of Eurovet in 2012 now contributes 18% of revenue.

The company is candid about this enormous market, which promises to grow as wealthier populations around the world continue to demand increasing quantities of meat, eggs and milk in their diets. It's a highly competitive market though, and one of its most significant products is antibiotics.

Many governments want to reduce the levels of antibiotics in the food chain because the routine use of antibiotics in animal feed as a disease prevention measure is being outlawed, although the prudent use of antibiotics to treat they increase human resistance and therefore present a health risk. Increasingly, therefore, disease is not.

Dechra says it has a very small market share and can grow even if the market declines – but its otherwise impressive results for the year to 30 June 2014 were reduced in the Netherlands, where veterinarians have cut antibiotic use by 50% in three years.

Overall Dechra raised revenue 2% and adjusted profit 13%, and the sale of its veterinary supplies and services business, NVS, enabled it to pay down debt to a very low level. The disposal may have improved profitability. Return on capital in 2014, mostly without NVS, was 24%, compared to 17% the year before.

Dechra's first set of results since it focused exclusively on pharmaceuticals may bear out its strategy, founded on enhancing its portfolio through development and acquisition, and an integrated manufacturing and sales operation.

Unfortunately a share price of 743p values the enterprise at about £680 million or 20 times adjusted 2014 profit. The modest earnings yield of 5% may already reflect the positive: that the company is profitable and knows where it's going.    


The profitability of retailers, and their valuations, are consistently overrated because analysts fail to include operating lease obligations, which can be regarded as a kind of debt. But Dunelm is resoundingly profitable, earning a return on capital of 17% even after roughly capitalising operating lease expenses. The company owns a chain of homeware stores expanding around the UK at a rate of more than 10 stores a year. In the year to 28 June 2014 it raised revenue and adjusted profit 8%.

Its mantra is 'simply value for money', supplying higher-quality products than supermarket chains at lower prices than department stores. With 136 stores, the store locator on its website is a pretty crowded map, though, and as the country becomes saturated the rollout of its successful format will slow.

Dunelm is refreshingly upfront about this, consistently reporting its mature portfolio of stores will be about 200 – a figure some investors suspect is conservative. As it gets closer to maturity, the length of time it takes for a new store to repay the investment is likely to increase as new stores cannibalise more sales from existing ones. At 24-36 months the payback period has remained broadly stable in recent years.

The big unknown is what the company will do when it runs out of new stores to invest its copious profits in. Maybe it will mature into a slower-growing company, or maybe it will attempt to roll out the format in other countries, or broaden it – all risky propositions risky.

Dunelm is distinctive, but a price of 800p blunts its attractiveness as a long-term investment because it takes growth for granted. It values the enterprise at over £1.9 billion, or 19 times roughly adjusted profit. The earnings yield is 5%.


Games Workshop manufactures and markets fantasy wargaming miniatures, games and publications promoted around the world in Games Workshop stores, independent hobby shops and online.

The zealous bluster of its chairman and acting chief executive, Tom Kirby, and the ire of a subset of customers provide two contrasting views of the company that are impossible to reconcile. So far, the company has been unapologetic about an unforeseen 8% reduction in revenue and a 20% reduction of adjusted profit in the year to 2 June 2014, brushing it off as the result of short-term disruption from the rapid conversion to a low-cost one-man store format.

Recent troubles aside, Games Workshop is in a strong position because it owns the intellectual property – the game rules, characters and fictional universes – of its two most significant wargames, Warhammer and Warhammer 40,000, which gives it the monopoly right to manufacture the miniatures. But some customers say it's exploiting that position by racking up prices.

The investment case for Games Workshop depends on it striking the right balance between keeping costs down and prices high, and keeping customers onside. Investors seem to be regaining confidence, though. A share price of 590p values the enterprise at £250 million, about 16 times adjusted earnings.

The earnings yield is 6%.

This feature was written for our sister publication Money Observer