Stocks to watch in February


The biggest set piece in a company's financial year is the publication of its full-year results, which reveal its performance over the year, and its financial state at the year-end.

If a company has had a good year, but experienced very favourable conditions, we ought to temper our enthusiasm, and if it has struggled, but experienced unusually difficult circumstances, a calm investor would reign in disappointment.

World Careers Network, a small software company that has been growing through the recession, is an example. By its own admission it has had an exceptional year. It supplies blue-chip companies such as Marks & Spencer and HSBC, government agencies and universities with recruitment software and support.

Thanks to the completion of a number of large projects, it achieved adjusted profit growth of 71%, with cash flow up 62% and a 45% rise in net cash.

The company has no debt. This is undeniably good news, but WCN only turned over £7 million in 2012, so it's easy to see how a few new projects could make a big difference. It's important not to get carried away, and the same would be true in a year in which the company signed up a few less customers.


Airlines generally use a combination of operating leases and bank debt to fund their aircraft, but saintly easyJet has chosen to capitalise its operating leases and give investors more realistic figures.

The figures are impressive, especially since the company flies to Europe, which is in recession. Adjusted profits rose 19%, cash flow rose 10% and the airline was more profitable than it was last year. Net debt, including the approximate value of operating leases, has not fallen, but investors shouldn't complain. EasyJet used the extra cash to pay a special dividend.

EasyJet has flown into a headwind and emerged ahead of schedule thanks to a combination of skill and luck.

Holidaymakers still flew, while business travellers are more likely to consider budget airlines. Cancellations are a big factor for airline profitability and last year there was relatively little disruption at airports.

It can take some credit though. Its strategy of flying to major routes and undercutting "legacy' airlines, often former flag carriers, is working and it's invested heavily in an operational control centre, which helps manage bad weather and other cancellation events.


Another company that is performing well in the face of adversity is Euromoney Institutional Investor, now valued by the market at almost £1 billion.

The magazine publisher, database and events company is profiting by selling information to customers in the financial and business sectors, many of whom are not doing so well, while it manages a potentially tricky business transformation to digital information provision.

A basic mistake some investors, and commentators, make is judging the full-year results by the headlines at the top of the results statement. Often, this is information the company wants us to read, rather than what we need to read, although occasionally directors are disarmingly candid.

The solution to this problem is not to read the highlights, but to write your own. The summaries in the report table opposite are derived by calculating a few financial statistics, the change in sales, operating profit, cash flow and net debt, and seeking explanations for those changes in the directors' statements accompanying the accounts, and the notes.


Operationally, United Drug has had an interesting year, but the financial statements are more equivocal. Acquisitions helped adjusted operating profit rise 10% and cash flow rise 50% but net debt almost doubled to pay for them.

Chief executive Liam Fitzgerald started his results commentary by saying United Drug is "a truly international provider of services to global life sciences companies".

Judging by profit, that's true, but the notes show 64% of United Drug's turnover comes from Ireland where it's a wholesaler to pharmacies, and a further 25% comes from the UK. Newer international businesses are far more profitable, but the bulk of United Drug's operations are domestic and relatively unexciting.


Another company that is a little ahead of itself in persuading us it's changed is Future. The company publishes consumer magazines you'll find not too far from Money Observer on the shelves of your newsagent and, like most publishers, it's looking to the internet for growth in revenues and profit.

Future is a potential turnaround story but with adjusted profit rising, cash flow falling and net debt rising, the signals last year were mixed and the company's claim to be a "global digital business" deflects us from one salient detail in the chief executive's statement: that currently 82% of revenues are from print.


Feedback, an engineering company, appears to have no future. Chairman Nick Shepheard reports that turnaround efforts have floundered – the company was forced to sell one business, and the other operates in a competitive field where "the cost base is difficult to bear and the potential for organic growth is limited".

When directors are that candid, investors don't need statistics to tell them a company's in trouble, but it is reassuring they do.

For most companies, as long as we temper the words in the directors' statements with analysis of the numbers in the financial statements, our understanding will improve year-by-year. And as the report introduces us to new companies monthby- month – with insights into which are doing well, and which are doing badly - it might tell us about the economy too.

If it does, it will be a valuable counterpoint to the posturing of politicians and pundits, and the figures they bandy around.

This feature was written for our sister publication Money Observer