Four stocks to watch in January
Eco Animal Health
Judging by the share price of Eco Animal Health, investors are growing more cautious about the company's growth prospects. Eco owns and markets an antibiotic that targets respiratory and intestinal disease in pigs and poultry. It lifted revenue 10% and profit 4% in the year to 31 March 2014, and should publish interim results for the first six months of the year (ending in March 2015) in early December.
The antibiotic, marketed as Aivlosin, may have a prosperous future even in a world where antibiotic use in animals bred for food is restricted. Aivlosin is patented, efficacious and profitable, and it leaves the animal's body so quickly that it doesn't get into the human food chain. It cannot contribute to microbial resistance in humans, which is a major concern of health authorities and the focus of current legislation.
Eco was an agricultural conglomerate named Lawrence after its founder, but it shed most of its businesses in the last decade to focus on the development of its most promising animal medicine, Aivlosin, and a generic drug for the treatment of parasites. It's Aivlosin, though, that earns the company the lion's share of revenue.
While there's much to admire in Eco's dedication to Aivlosin, which it has been developing for at least 20 years, it's still a jam tomorrow share. Achieving marketing authorisations for each formulation of the drug for different diseases in different animals in different jurisdictions is an expensive process that takes many years.
While Eco is established and profitable in Asia and Europe, it's just getting started in the US, where its first authorisation was granted in 2012. Meanwhile the cost of obtaining authorisations uses up much of the company's cash flow.
The registrations are an investment in the future, but Eco had to raise funds last year to finance its growth ambitions, which demonstrates there is little jam today. A share price of 155p values the enter- prise at £83 million, about 17 times adjusted profit. The earnings yield is 6%, which implies investors still anticipate some growth. They're probably right, but they may need to be patient.
Euromoney Institutional Investor
Euromoney Institutional Investor's full-year results reveal a publisher rushing headlong into the digital age.
The company is a listed subsidiary nearly 70% owned by DMGT, the owner of the Daily Mail newspaper. It publishes magazines, data and research for finance and business, and it plans to move its titles onto a new authoring and publishing platform in 2015. Most of them should be digital only by 2016.
The strategy does not just represent a change in the technology Euromoney uses to distribute information: it's also shifting its source of revenue, reducing advertising in favour of subscriptions. Since subscriptions (print and digital) already account for a slim majority of revenue, with the rest split fairly evenly between advertising, sponsorship and event delegates, Euromoney may be making a smooth transition to its objective of becoming a focused online information business.
However, revenue growth in 2014 was very close to zero, despite five acquisitions, and adjusted profit grew just 1%. Debt, used to finance acquisitions, and the company's Capital Appreciation Plan (an incentive programme for staff) increased.
Euromoney says increasing costs of compliance and fines for past misdemeanours meant its investment banking customers were looking for savings, and the collapse in commodity prices meant less interest in its metals and commodities titles – developments that echo substantial falls in profit during the credit crunch.
Unsurprisingly, for a company in a minor cyclical slump pushing through strategic change, the shares may be good value. A share price of about 1,000p values the enterprise at £1.4 billion, about 14 times adjusted profit. The earnings yield is 7%.
But with size comes complexity.
Euromoney's accounting is complicated by large amounts of goodwill and intangible assets from acquisitions, which are difficult to value. The Capital Appreciation Plan may put more emphasis on growth than profitability. And Euromoney's willingness to increase debt for the first time since the credit crunch may presage a more acquisitive phase, weakening the company's restored finances. Until this year, which ended in September 2014, Euromoney had reduced debt in each successive year since the credit crunch.
Falling turnover and profit at Fenner are symptomatic of temporary weakness in coal prices and the global economy, but attempts to reduce carbon emissions may pose a permanent threat. Fenner, which makes conveyor belts for coal miners and other extractive industries, and components for industrial and healthcare applications, is susceptible to recession and low commodity prices. In the year to August 2014, revenue fell 11% and adjusted profit fell 21%.
Judging by Fenner's enthusiasm for diversification over the last decade, it was preparing for a time when commodity prices would weaken. The company expects growth in its smaller but more profitable Advanced Engineered Products (AEP) division to be offset by contraction in Engineered Conveyor Solutions (ECS), which supplies mining companies.
Economic growth and commodity prices follow separate cycles that can last many years or decades, but Fenner may also be up against a permanent headwind as governments take on climate change. Coal is the biggest market for Fenner's belt; it's also one of the principal sources of electricity, and one of the dirtiest sources of energy.
Falling levels of investment at American coal mines in 2014 are the result of uncertainty about US government policy, as well as low coal prices and the abundance of a substitute in natural gas from fracking. Mandatory carbon emission levels for power stations in the US may force older coal-fired stations into retirement and encourage more electricity generators to switch to cleaner gas, wind and solar energy. In November, the US and China struck a deal that should reduce emissions in the US and cap them in China (by 2030).
The market's valuation of Fenner reflects the uncertainty. A share price of 260p values the enterprise at £745 million, about 12 times adjusted profit in 2014. That puts the company on a tempting earnings yield of 9%. Tempting, that is, if earnings at 2014's reduced level are sustainable.
Fenner has been very profitable during a period of rising commodity prices. It remains to be seen whether its more recently acquired businesses can cushion the impact if falls in commodity prices are sustained and governments continue to pressure electricity generators to burn less coal.
Traders have got the hump with Majestic Wine. But the company's pedestrian performance may belie underlying strengths. The specialist wine retailer has earned investors consistently strong returns for years, but a modicum of growth (1% in terms of revenue and adjusted profit) in the year to March 2014 and the promise that 2015 will have 'a flatter profile' may be behind the sell-off this year. At the company's half-year in November, profit declined over the same period in 2014.
Majestic blames a post-Christmas hangover for its performance in the year to March 2014, and explains that increased investment in new stores and central facilities such as new warehouses is holding back profitability in the current financial year, which it describes as “one of investing to put in place the building blocks to deliver future growth”.
The attraction of Majestic is its long record of high profitability and the niche it carved for itself by restricting wine purchases. Initially it would only supply a minimum of 12 bottles of wine, although some years ago it reduced the minimum purchase to six bottles.
Majestic's customers are wine enthusiasts who want to keep a selection of wines at home, or people buying in bulk for special occasions. By attracting higher-spending customers, who pick up their wine from low-rent out-of-town warehouses, the company has managed to make big profits and keep loyal customers.
The main threat used to be supermarkets, but increasingly it's also specialist mail-order wine sellers that have been given new life on the internet and are targeting the same enthusiast market. Majestic itself makes 10% of revenue through its website and although its hybrid model is probably very efficient, the company says lower sales growth reflects heightened competition.
A share price of 375p reflects the uncertain attitude of investors towards Majestic. It values the enterprise at £325 million, about 15 times adjusted profit. The earnings yield is 7%. For a company with Majestic's record, that could be good value.
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%.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.