Weekly Commentary: 18/11/19 – What Goes Around….

What Goes Around….

It is clear the technology growth bubble is now starting to unwind but the difficult question is where to go to next? I have wondered about the mining sector in previous weeks and last week I used some SharePad screens to find cheap, well capitalised, quality companies. In truth I have been casting around for the right kind of stocks for the next stage of this cycle. Sometimes you can’t beat gut feel. And I find myself thinking you can’t beat a good old-fashioned UK manufacturer in this era of increased nationalism and a weak pound.

Exchange Rates – 24% devaluation

The UK’s three main trading partners are US (13.4% of exports), Europe (28.7% of exports) and China (5.7% of exports). It would seem likely that China is likely to grow the fastest. The respective sterling depreciation against each currency over the last 10 years is illustrated in the SharePad charts below:

The devaluation against the dollar since the 2015 high is 24%, and 19% against the Euro and 15% against the Chinese Renminbi. So British exports have become 15% to 24% cheaper over the last 5 years while the market has been focussing on allocating capital to over valued structural growth opportunities. It may just be that the elephant of declining sterling has quietly been sauntering past the investors boardroom window and is now ready to sit at the table. We may also start to understand the US/China trade war as the dollar has been appreciating against the Renminbi making Chinese imports cheaper in the US which makes the President unhappy.

This of course could well benefit the FTSE 100 as in the region of 75% of those companies’ earnings are derived from exports. But it may also benefit more traditional exporting industries.

When learning about the Midlands metal bashers many years ago during an education meeting with an engineering analyst I looked at his list of stocks and asked what Castings did. He looked at me and bluntly asked “What do you think it does”. The excitement of being able to see molten metal poured filled me with a childhood excitement I hadn’t experienced since getting my Hornby trainset for Christmas. Hurriedly we organised a tour of Midlands metal bashers and my world was lit up by old fashioned companies “Boys’ Own” products and seemingly made sustainably high returns for shareholders.


A list of these traditional stocks is shown below in rating order:

2019 11 18 Jeremy G Weekly Commentary traditional stocks

It is interesting that Spirax-Sarco, a very traditional manufacturer of steam pumps is now the most expensive, which I suspect is in no small part due to its inclusion in sustainable portfolios. As a group these companies produce very good ROE’s indicating the presence of a competitive advantage. But they do go in and out of stock market fashion. I suspect with the cycle changing if we can find some of these companies which are exporting and lowly rated over the next few years of earnings growth, we could see them re-rated upwards.Source: SharePad

Rating Cycles

If we click on the PE number in blue list view on on SharePad we get the history of the average daily PE rating over the last 16 years and to see where the company stands in its popularity cycle I have exported this data and charted the rating history for each of the above stocks in order of current rating:


2019 11 18 Jeremy G Weekly Commentary spirax sarco
Source: SharePad

Rating had doubled from 15 X to 32X in 9 years. These steam pumps have become a new sustainable way of producing energy, so the company is appealing to a new audience, as well as being a high quality business.


2019 11 18 Jeremy G Weekly Commentary zotefoams

Source: SharePad

Rating is close to peak in 2007. Trading has recently deteriorated but the company has launched a recyclable packaging product.


2019 11 18 Jeremy G Weekly Commentary avon
Source: SharePad

Rating has exceeded peak in 2007. Traditionally a gas mask and milk liners business expanding into other protection products and dairy products has delivered an increased rating.


2019 11 18 Jeremy G Weekly Commentary chemring
Source: SharePad

Close to peak rating. This defence industry supplier has grown its information security business alongside its countermeasures business and is winning contracts rapidly. This could be a beneficiary of increased defence spending in the new era of nationalism.


2019 11 18 Jeremy G Weekly Commentary ultra electronics
Source: SharePad

Very stable rating. Share price follows profits. The systems provider to the defence industry is trading well and may benefit from increasing defence spend.


2019 11 18 Jeremy G Weekly Commentary hill smith
Source: SharePad

Trades between 10X and 20X. 18 X inconclusive. This manufacturer and supplier of galvanising services and infrastructure products delivers a great ROE and grows turnover at 10% under a conservative management team. The rating is deservedly full.


2019 11 18 Jeremy G Weekly Commentary bodycote
Source: SharePad

Off the top but inconclusive. The shares have suffered as trading has been tough in their automotive and industrial markets. The company supplies heat treatments, coatings and hot isostatic pressing from its Macclesfield base.


2019 11 18 Jeremy G Weekly Commentary castings 1

Source: SharePad

Off the top. The company, in common with Bodycote, reported weakening markets for the foundry in the quarter to September 2019, while machining revenues fell. The rating decline may reflect reduced profit expectations but is not yet cheap by historic standards.


2019 11 18 Jeremy G Weekly Commentary trifast
Source: SharePad

This used to be a 20X multiple stock. Recent reports of trading challenges at the pre close statement have caused the rating to decline. Cheaper but not yet in value territory.


2019 11 18 Jeremy G Weekly Commentary ricardo

Source: SharePad

Could be a 20X multiple stock. The rating looks to be at the bottom end of its 16-year range. The last set of results reported flat underlying profits.


2019 11 18 Jeremy G Weekly Commentary walker greenbank

Source: SharePad

Looks like a trough rating. Recent results showed a 14% underlying PBT increase but challenging conditions in the consumer furnishings market.


2019 11 18 Jeremy G Weekly Commentary volex
Source: SharePad

This is 8X rated stock could be 15X. Results to September delivered 70% PBT growth and a confident statement following investments made in products, manufacturing, and acquisitions. The outlook referred to “significant opportunities”.


2019 11 18 Jeremy G Weekly Commentary renold
Source: SharePad

The company reported tough trading conditions at results last week but stable profits following cost efficiencies. The rating certainly looks like a trough rating with the potential to reach 15X-20X, if the anticipated earnings are real.


2019 11 18 Jeremy G Weekly Commentary 600 group
Source: SharePad

This one spends a lot of its time trading on 5X PE. With a market cap of £21m and £8.5m warrants outstanding at 20p it may explain why the shares remain at 18p. The warrants expire in February 2022 so until this event has passed the shares may well remain lowly rated.

Filtered List

In the quest for good quality out of favour stocks from the above chart’s history would suggest the following companies have potential to improve their rating substantially in this next phase of the investing cycle.

  1. Renold
  2. Volex
  3. Walker Greenbank
  4. Ricardo
  5. Trifast

In turn:


Share Price 19p

Mkt cap £42m

  • Business 81% is production and distribution of chains and 19% Torque transmissions. The company is headquartered in Manchester
  • Exports 41% of the revenue is derived from the US and 30% from Europe with only 7% derived from the UK.
  • ROCE The ROCE is a low 8.5%. Following a mis statement of assets, the company is now reporting challenging trading conditions so not much to excite here. The company has negative net assets and as well as £34m of net debt there is a £101m pension deficit.


Share Price 114p

Mkt cap £170m

  • Business The company produces cable assemblies (47%) turnover and power cords (54% turnover). Head office is in Richmond.
  • Exports 44% of revenue is sold into Asia with 32% into the US and 23% in Europe
  • ROCE reached 21% last year to March having moved up from 15% in the prior year. Net cash is $21m. the results in June showed an excited outlook statement referring to the opportunities to increase both revenues and margins.

Walker Greenbank

Share Price 79p

Mkt cap £56m

  • Business The company manufactures and licenses interior brands from premises in the UK. The head office is in Denham, Bucks
  • Exports 58% is sold into the UK with 15% into the US. Rest of world is 15% and Europe 12%
  • ROCE has been a lowly 8.5%-10% over the last couple of years. The brand licenses have the potential to increase the ROE, but these are still only 7% of revenue. Meanwhile underlying trading conditions are reported to be tough


Share Price 659p

Mkt cap £351m

  • Business 70% of revenue is derived from what is termed technical consulting which is automotive consulting for the vehicle manufacturers and the defence sector as well as the rail industry while 30% revenue is derived from the sale of performance products. The Head office is in Shoreham
  • Exports 40% of revenue is from the UK with 25% derived from Europe. US accounts for 16% with Asia a lowly 8%. Results in September stated the company is well positioned for growth while it delivered only 2% revenue growth.
  • ROCE is a healthy 13.8%. Net debt is £47m on net assets of £172m


Share Price 163p

Mkt cap £198m

  • Business Manufacture and supply of fasteners. Fasteners is a collective term for nuts, bolts, rivets, glue and assorted other items used for connecting assemblies together. Head office is in Uckfield, West Sussex.
  • Exports 36% of revenue is derived from the UK, 36% from Europe and 23% from Asia.
  • ROCE is a healthy 15%. The ROCE is forecast to decline as the company invests in Project Atlas to modernise the business. The October trading update reported challenging trading conditions, but a solid pipeline of new business. Net debt is £14m


Of the five shortlisted companies:

Renold – The low ROE coupled with poor current trading and the high pension deficit is putting me off this one. It is hard to be sure there aren’t more deep-rooted structural problems going on.

Volex – The 21% ROCE has shown some good recovery. There are allegedly some new products that could improve margins and with net cash on the balance sheet it is possible to see the rating on this share double over coming years. There is also a new CEO

Walker Greenbank – The low ROE is likely to improve when the license income becomes a larger part of the whole. There is a lot of upside and a new CEO. It may be a little early yet but over the medium term this could do well.

Ricardo – This is a high-quality ROCE with dull trading but is well positioned for growth. It is possible to see this high-end engineering consultant double its valuation when growth is delivered. Having witnessed the increase in Spirax-Sarco’s rating on the back of its sustainability credentials I wonder if this one could experience a similar dynamic as it contributes to a more efficient transport infrastructure.

Trifast – With a historically healthy ROCE set to decline I find myself wondering if it may be some time before we see the benefits of the investment. Short term market conditions are said to be challenging too. Can’t get excited here.

Personal View

My picks would be Volex and Ricardo.


History looks set to repeat itself so alongside miners’ industrial metals it may well be that some of these long-established old-fashioned metal bashers come back into fashion. They still generally make good ROE’s. A large proportion of their revenues are derived from overseas and with the pound having declined 15% against the Chinese Renminbi and 24% against the US Dollar over the past 5 years they could just come back into fashion.

Typically, most of these stocks trade between 10 and 20X PE multiples when they are in or out of favour so alongside resilient earnings growth there could be significant valuation uplifts to enjoy over the coming years. It could just happen for Volex and Ricardo.

Forthcoming Events

One of the admirable features of this collection of companies is they are in the habit of providing trading update towards the year end. We may expect news flow as follows

2019 11 18 Jeremy G Weekly Commentary events

Source: RNS, Estimates