I previously did a stock screen looking for strong companies with good returns on investment. I’ve started going through the list looking for the ones I can quickly illiminate from my detailed analyses. Here are the first 3.
LSE:MGNS – Morgan Sindall
Morgan Sindall is a construction and refurbishment company. After closer inspection of their financial statements, their business is in decline due to reduced government spending on construction, a trend I don’t expect to stop any time soon. This means their returns on investment, and returns on equity are deteriorating each year. Also their business is quite capital intensive, their free cash flow is essentially equal to their dividends. While they have quite a high dividend yield (7.1%), this is all the cash investors can expect to receive which makes it less attractive. Earnings are in decline so who knows how long that dividend can be maintained. Their tangible book value gives no safety net either.
In conclusion, their returns on investment are falling, and with razor thin profit margins this is not the strong company I was looking for. I’m not opposed to investing in the business but would need a higher dividend yield.
LSE:NXT – Next plc
Next is a fashion retailer that most people living in the UK will be familiar with. My first impression is that they have no unique selling point in terms of their design and offerings over other retailers. They earn quite impressive margins, but the first thing I note is that their free cash flow is lower than reported profits. Not positive for a value investor. I’m impressed with managements focus on profit margins and returns on capital, but they have a long history of declining like-for-like sales.
Hence, given their cash flows are consistently lower than profits, and they currently trade at a forward PE ratio of 14.6 this isn’t an investment for me at this time. They clearly have a strong management that know what they’re doing though.
LSE:SMWH – WH Smith plc
Another retailer of magazines, newspapers, books and DVDs/BluRays that I can’t see any specific competitive advantage for. Personally I know them to be quite overpriced for many items and I rarely shop there. But their profits margins and returns on equity are not bad for a retailer. They see their business in two segments. First is ‘Travel’ which are shops for people on the move e.g. in airports or railway stations. The second is high street shops.
I can see the appeal of the travel section, it’s based on impulse buying, however I can see no bright future for the high street segment, with comeptition from the shift towards online content which will only grow.
For this reason, as around half of their profits are from the high street, I do not think there is a possibility of them being undervalued at the current PE ratio of 11.3. The future is too uncertain and I don’t like to invest in companies at a comeptitive disadvantage. Hence I’ll stop my analysis here.
More analysis will come of the stock screen, in my first quick flick through some of the companies there is a lot of potentional to find a great company in there.