Chasing a four-leaf Clover in a subdued environment
It was a star performer last year, with the share price rising 90 per cent as earnings grew and its price-earnings multiple (P/E) expanded.
By the end of the year the company was trading on a hefty multiple of 14.1 times historical earnings. The market warmed to the outlook and that the company had been generating a return on equity of about 30 per cent.
The share price hit a wall towards the end of 2012 when the company said sales growth in the September quarter had been a timid 5.9 per cent.
The company followed that up by forecasting modest sales growth for the six months to December. After initially dropping, the share price has steadied and is trading at about 52¢.
It would be fair to say that if Clover posts 6 per cent sales growth for the financial year the price will adjust lower. Investors will be happy to sit out until they see evidence of stronger top-line growth with new products in 2014.
But if Clover reports a boost in revenue of more than 10 per cent in the December quarter, the price will kick through 60¢ a share.
Thorn Group
SHARES in retail rental company Thorn Group have bucked the upward market trend and fallen a hefty 15 per cent in February. Not even an upbeat half-yearly profit announcement from JB Hi-Fi managed to lift Thorn out of the doldrums.
The catalyst behind the recent demise could simply be a correction after a 30 per cent rise in the final six months of calendar year 2012.
A more powerful reason has been the need for analysts to temper their 2014 financial year earnings.
Thorn is unusual because its financial year is to March 31, meaning the 2014 year is only a matter of seven weeks away from starting. Until recently, analysts had factored in modest earnings per share growth in 2014 but a subdued core business - Radio Rentals - plus the need to spend on new initiatives means there now could be no growth for the group.
The company says price deflation of electronic goods and uncertainty in an election year are behind the downbeat environment. Adding to investors' concerns has been the recent sale of shares by managing director John Hughes.
Investors are also concerned that the NCML debt collection business, purchased in 2011 for $32.5 million, has not delivered a decent return.
Thorn Group is by no means expensive, trading about 10 times 2013 and 2014 earnings. If the stock continues to be sold off in the lead-up to the 2013 full results due for release in May, it might present a buying opportunity. Until then, it might be best to observe.
UXC/Monadelphous
IT IS difficult to buy a stock that has run hard. It invariably looks expensive based on historical earnings and not worth the risk. But it is important that we don't simply ignore these stocks, because the market might be underestimating earnings growth.
Two such stocks that report earnings in coming weeks are technology services business UXC and mining services juggernaut Monadelphous.
UXC's shares have risen 187 per cent in the past year. On historical earnings, it is trading on about 17 times, which is expensive. Its earnings, despite good growth in the past six months, are not going to justify a re-rating. But investors need to look to 2014, where the benefits of recent contract wins are being underestimated.
The latest, with Queensland Health, delivers a big boost to the top line and should see margins continue to expand. Despite improvements under managing director Cris Nicolli, the company's profit margin still lags competitors and there is significant upside.
Meanwhile, West Australian-based Monadelphous keeps climbing. The latest catalyst has been the better than expected outlook delivered by mining services company Bradken.
Monadelphous trades on a historical P/E ratio of more than 16.5 times, which is remarkably high for a mining services group.
The company will need to grow earnings in total between 40 and 50 per cent in 2013 and 2014 to support the valuation. At the annual meeting in November, the company said it had enjoyed growth of 40 per cent in the December half but watered down full-year 2013 growth to 25 per cent.
The Age takes no responsibility for stock tips.
matthewjkidman@gmail.com
Frequently Asked Questions about this Article…
Clover produces omega-3 oils for food products (including infant formula). Its shares were a star performer last year, rising about 90% as earnings grew and the P/E multiple expanded. By year‑end it was trading on roughly a 14.1 times historical earnings multiple and delivering around a 30% return on equity; the share price later steadied at about 52¢.
According to the article, if Clover posts only about 6% sales growth for the financial year the share price would likely adjust lower. Conversely, a December-quarter revenue boost of more than 10% could push the price through 60¢ a share. Investors are looking for stronger top‑line growth and new products in 2014 as a catalyst.
Thorn Group shares fell about 15% in February. Reasons cited include a correction after a roughly 30% run-up in late 2012, analysts tempering 2014 earnings expectations, a subdued core Radio Rentals business, the need to spend on new initiatives, price deflation in electronic goods, election‑year uncertainty, and a recent share sale by managing director John Hughes. Investors are also concerned the NCML acquisition hasn't yet delivered strong returns.
The article notes Thorn trades at about 10 times 2013 and 2014 earnings and suggests that if the stock continues to be sold off ahead of the full‑year results due in May it might present a buying opportunity. Until then, the commentary recommends observing rather than rushing in.
Thorn bought NCML, a debt collection business, in 2011 for $32.5 million. The article says investors are concerned that NCML has not yet delivered a decent return on that investment.
UXC shares have risen about 187% in the past year and trade on roughly a 17 times historical P/E, which looks expensive on past earnings. The article highlights that recent contract wins — notably with Queensland Health — should boost the top line and help margins, so 2014 earnings could be underestimated by the market.
Monadelphous trades on a historical P/E of more than 16.5 times, which is high for a mining services group. To justify that valuation the company would need to grow total earnings between about 40% and 50% across 2013 and 2014. The firm reported about 40% growth in the December half but trimmed full‑year 2013 growth guidance to 25%.
The article advises that stocks which have run hard often look expensive on historical earnings and can be risky to buy immediately. However, investors shouldn’t automatically ignore them — the market can underestimate future earnings growth. It’s sensible to watch upcoming earnings reports and catalysts (contract wins, revenue beats) before making a move.
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