Identify, and run your winners

Friday, 30th October 2015 09:14 - by David Harbage

As promised last week, this article seeks to highlight industry leading, UK based businesses which have been successful over the past decade with a view to constructing an informal diversified portfolio.

Regular readers will know that assessing the current worth of a company share is a critical consideration for an active fund manager who seeks to add value by finessing core investments. Essentially by top slicing positions, when the price exceeds fair value, or alternatively adding to a position when the price appears to have unfairly fallen.

However, in this instance, we shall ignore shorter term equity valuation and focus on company stocks which appear well positioned to benefit over the longer term - of say five to ten years. History shows that the prime driver of a share's worth is the income that it produces, and here we shall primarily focus on earnings but also be mindful of their quality (by reference to cash flow) and that which is distributed (via dividends) to shareholders. There is a reasonably tight correlation between EPS (earnings per share) and capital plus distributed/reinvested income worth.

It is not surprising that most of the selected companies have strong, if not leading, positions in their respective segments of commerce - in part as a consequence of their track record - but there is a mix of incumbent industry giants and newer competitors that have spotted and chased a business opportunity. Perhaps the best example of this is BT and Sky, who compete in communication services as well as in broadcasting, but both offer interesting prospects. For the most part, only one selection has been made for each area of business activity, with exceptions being made where greater scope for growth resides - be it facilitated by technology or as a result of limited supply. Our intention is to monitor these twenty company stocks, as news flow or other development prompts, but for the purpose of this article comment on each (FTSE100 constituent, unless stated to be in the FTSE250 index) business will be limited.

Aviva - £19 billion market capitalisation (total worth of all issued equity) international life and general assurer. Yesterday's trading update pleased analysts and investors alike; looking out further, the stock is priced on 9.7 times consensus forecast earnings for the year to December 2016. A potential 11% rise in profits and a hike in dividend leaves the stock yielding a likely 5.1% based on calendar 2016's payout. Of 21 brokers monitoring the company, 16 are buyers, 4 are neutral and 1 says sell.

Using the same metrics, the following companies also merit inclusion:

Berkeley Group - the £4.5bn m.cap upmarket, London-focused house builder is priced on 8.7x anticipated EPS for the year to 30 April 2017. A 52% jump in profit is forecast, with a prospective 5.1% income yield (covered 2.5 times by earnings); on the Sell side, 3 brokers have a buy recommendation, 4 suggest hold and 1 a sell.

Bovis - £1.4bn m cap FTSE250 index South East England (not London) house builder is priced on a forward PE of 8.3x, based on projected EPS (set to grow 21%) for the year to 31 December 2016 accompanied by a 4.5% yield. 7 brokers suggest buy, 3 are neutral, no sell recommendation.

BT - £39bn cap domestic telecom giant and broadcaster (BT Sport), which recently acquired mobile telecom operator EE, is priced on a PE of 14.3 times forecast EPS (set to grow 7%) to 31 March 2017, featuring a yield of 3.4%. 9 brokers possess a buy recommendation, 6 are neutral, 4 say sell.

Capita - £8bn cap support services business, a prime beneficiary of increased outsourcing by the public and corporate sectors as they seek to take cost off their balance sheets, is priced on a PE of 16.6 times forecast EPS (set to grow 7%) to December 2016, featuring a yield of 2.7%. 5 brokers possess a buy recommendation, 11 are neutral, 2 suggest sell.

easyJet - £7bn cap low cost, short haul airline, experiencing growth in both business and leisure travel, is priced on a PE of 11.7 times forecast EPS (set to grow 9%) to September 2016, with a yield of 3.4%. 5 brokers have a buy recommendation, 11 are neutral, 2 suggest sell.

Greene King - £2.5bn cap brewer and operator of 3,100 pubs, after the acquisition of the Spirit group, is a beneficiary of higher domestic consumer spend and secular trend to ‘eat out’. It is priced on a PE of 11.2 times forecast EPS (set to grow 12%) to April 2017, with a yield of 4.2%. 8 brokers have a buy recommendation, 4 are neutral, 2 suggest sell.

HSBC - £100bn cap international bank with a significant emerging market presence representing an exposure to global GDP, is priced on a PE of 9.9 times forecast EPS (set to grow 1%) to December 2016, with a yield of 6.5% (covered 1.5 times by said earnings). 11 brokers have a buy recommendation, 12 are neutral, none suggest a sell.

Imperial Tobacco - £33bn cap producer of tobacco products which expanded its US operations via the acquisition of ITG Brands this year is priced on a PE of 15.1 times forecast EPS (set to grow 12%) to September 2016, with a yield of 4.4%. 12 brokers have a buy recommendation, 4 are neutral, 3 suggest sell.

Next - £12bn cap clothes retailer has successfully progressed its online capability alongside stores and Directory (evidenced in this week’s trading statement) is priced on a PE of 17.1 times forecast EPS (set to grow 6%) to January 2017, with a yield of 5.2%. 6 brokers have a buy recommendation, 14 are neutral, 3 suggest sell.

Reckitt Benckiser - £45bn cap producer of branded health and household products which it has promoted, via impressive like-for-like sales growth (+7% in Q3 2015), into almost every country is priced on a PE of 25 times forecast EPS (set to grow 7%) to December 2016, with a yield of 2.1%. 15 brokers have a buy recommendation, 10 are neutral, 2 suggest sell.

Rio Tinto - £32bn cap extractor of industrial minerals (biased towards iron ore, aluminium, copper and coal), dependent on global GDP and demand from emerging economies, is priced on a PE of 14.9 times forecast EPS (set to fall by 7%) to December 2016, with a yield of 6.1% (covered 1.05x). 16 brokers have a buy recommendation, 11 are neutral, 2 say sell.

Royal Dutch Shell - £109bn cap Anglo-Dutch oil & gas producer is the largest constituent of the FTSE100 index, seeking to acquire the £35bn cap BG Group, is priced on a PE of 12.8 times forecast EPS (set to grow 4% after a weak 2014 &15) to December 2016, with a yield of 6.9% (covered 1.1x). 23 brokers have a buy call, 10 are neutral, 1 suggests sell.

Sky - £19bn cap broadcaster (best known for Premier League football) and communications business featured in blog of 21 October after announcing a profit beat on that day is priced on a PE of 17.4 times forecast EPS (set to grow 13%) to June 2016, with a yield of 3.2%. 8 brokers have a buy recommendation, 10 are neutral, 4 suggest sell.

Smith & Nephew - £10bn cap medical devices group, specialising in knee joints and other orthopaedic products, (perennially tipped as a takeover target) yesterday acquired a US robotic business Blue Belt Technologies is priced on a PE of 18.2 times forecast EPS (set to grow 13%) to June 2016, with a yield of 1.9%. 12 brokers have a buy recommendation, 6 are neutral, 1 suggests sell.

Unilever - £37bn cap branded personal & homecare goods and refreshment & food products business, recently featured in blog of 15 October after reporting trading results ahead of City expectations, is priced on a PE of 21.1 times forecast EPS (set to grow 5%) to December 2016, with a yield of 3.1%. 9 brokers have a buy recommendation, 8 are neutral, 4 suggest sell.

Unite - £1.5bn cap real estate FTSE250 index constituent that specialises in providing affordable housing for students and key workers, via 132 UK properties, is priced on a PE of 27.6 times forecast EPS (set to grow 13%) to December 2016, with a yield of 2.4%. NAV (net asset value) grew 20% to 520p in half year to June 2015. 5 brokers have a buy recommendation, 1 is neutral, 1 say sell.

Whitbread - £9bn cap leisure company, which features Premier Inn hotels, Costa coffee plus various restaurants and last week announced a profit beat for the half year to 27 August, is priced on a PE of 18.5 times forecast EPS (set to grow 12%) to February 2017, with a yield of 1.6%. 8 brokers have a buy recommendation, 1 says hold, 1 suggests sell.

Workspace - £1.5bn cap real estate FTSE250 index constituent, that specialises in providing office space to 4,000 small businesses across London via its 80 properties, is priced on a PE of 38.6 times forecast EPS (set to grow 17%) to March 2017, with a yield of 1.6%. NAV grew 42% to 703p in the year to March 2015. 9 brokers have a buy recommendation, 2 are neutral, none say sell.

WPP Group - £19bn cap global media business which, as it specialises in advertising and public relations, has been a useful barometer for consumer confidence and propensity to spend on branded product in particular. The stock is priced on a PE of 14.5 times forecast EPS (set to grow 8%) to December 2016, with a yield of 3.4%. 20 brokers have a buy recommendation, 10 say hold, none suggest sell.

As might be anticipated by their track record, prospects and popular following, most of the above mentioned stocks carry a premium rating as they have benefitted from upgrades in forward earnings or asset worth projections. There are a few exceptions – by reference to less impressive recent trading results emanating from the likes of HSBC, Rio Tinto and Royal Dutch Shell – but for the purpose of this exercise we choose to take an interest in every major industry sector. If and when those prospects change, by reference to either the industry or a company specific development, inclusion within this list of leading businesses will be reconsidered. Finally, within this blog, we intend to critically monitor the performance of these stocks on a monthly basis and look forward to receiving any feedback from readers.

Written by David Harbage for lse.co.uk on the 30th October 2015

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.