So, after the purchase of Big Yellow Group in October I was on the lookout for another suitable company to invest in.
After putting together a rough and ready excel macro to analyse price against p/e, my programming efforts informed me that I’d bought BYG at a point where it’s P/E is 25% higher than it’s average.
Shares tend to revert to the mean, so evidently I didn’t choose the smartest point at which to buy BYG. This has been borne out by a drop of 6% in the price… In my previous incarnation I’d be getting twitchy, but I’ve bought it for it’s dividend and still have confidence in the business. I will do my best to avoid overpaying in the future.
Interserve and other Potential Candidates
On my list of UK based possibles was DS Smith, Smurfit Kappa, Whitbread and Interserve. Armed with my new tool to analyse P/E I made a conscious effort to avoid overpaying for a company. Below are four shares that are on my watchlist.
DS Smith – SMDS
DS Smith is involved in the packaging business. It is a fast growing company, with a good history of growing EPS and dividends over the last five years.
In that period revenue has doubled and the amount of pre-tax profit has increased from £21 to £200 million.
The business seems to be in good shape, with some smart acquisitions in Europe. At this point I looked at the P/E of DS Smith compared to it’s historical average and it looks a little overpriced. For the time being it’s a pass, but if the price comes down i’d take another look.
Smurfit Kappa – SKG
Smurfit Kappa is also in the packaging industry, a market leader in corrugated packaging in Europe. It’s current revenues are twice the size of DS Smith. It’s ROCE is also higher at around 21%, so it’s objectively a more efficient operation.
If the EPS and Dividend continue increasing at the average rate of the last five years the dividend this would be a nice earner to have in the portfolio. Although looking a little closer, the dividend has been increasing at twice the rate of EPS, so i’m not sure that such rapid dividend growth is sustainable.
Looking at the P/E compared to it’s historical averages it’s pretty much at the average. So not cheap, but not overpriced like DS Smith or Big Yellow Group.
This is a good looking share and one I would like to own. In my reckoning it edges out DS Smith, it will be interesting to see how this progresses.
Whitbread – WTB
Whitbread is the parent company for two well known UK brands, Premier Inn and Costa Coffee.
I’ve stayed in a few Premier Inns and they are well honed operations. Competitively priced, no frills, they do the job you want with no fuss.
The check in and check out process is efficient, the breakfasts are spot on and the rooms are surprisingly nice. They have a refurbishment program rolling out across the UK, perhaps i’ve not stayed in the older hotels yet… But my impressions are overwhelmingly positive. They also force direct booking so they’re not losing money on commissions to third parties.
Whitbread also run Costa Coffee, a chain that’s present in almost every town and city across the UK.
Costa are also in the motorway service stations, in the airports – and in the Premier Inn Hotels! So last week I decided to pay a visit to Costa Coffee to get a better feel for them. Make mine a mocha good man…
The main coffee chains in the UK are Starbucks, Caffe Nero and Costa Coffee. Each occupies a slightly different place in the coffee shop hierarchy.
The prices are pretty consistent across the three, the main area in which Costa seemed to differ was in the decor and ambience. Starbucks and Caffe Nero emphasise dark mahogany style wooden counters and furniture. Costa Coffee doesn’t take itself so seriously, with slightly more vibrant (garish) colour schemes and a less sophisticated (downmarket) feel.
The service was a little too perfunctory for my liking. It’s a high volume operation, but it didn’t have the same polish as the other two. In short, not my cup of tea.
The dividend on Whitbread is a respectable 2.6%, it’s a big resilient company. I certainly need to have a few heavyweights in my portfolio so I’m quite keen on this share. The price at the time of writing is £34.80 which is fair enough, having come down from highs of £54 in early 2015.
Interserve – IRV
The business operates in three main areas, facilities management, construction and support services. With offices across the world servicing different industries the company is able to compensate for lacklustre results in some geographies with stronger results in others.
The average yield has been 4.7% over the last 5 years. It has risen by an average of 5% per year, at the current share price this would result in a yield of 7.14%.
The share price took a big hit in May 2016 after delays in a contract prompted a £70m payout. The shares dropped 18% and haven’t yet recovered. Looking at the P/E, the shares are at the lowest they’ve been since 2012. There is an element of unresolved risk with these shares.
I took the plunge in early November and bought shares at 362.50. A few weeks later and the price has dropped to 296.22… A further drop of 17%. This makes the shares seem very cheap, or perhaps there’s more bad news on the way…
Share Price Updates
My last two purchases have both dropped significantly, my timing is proving to be a little off. Over the course of the next few years I hope my selections prove to be astute. Time will tell.
Meanwhile, I haven’t yet ventured into the three industries which I originally intended to target. Automation, Healthcare and Water. A company i’ve been tracking since it’s IPO, Blue Prism, has almost doubled in price the last few months.
Should Blue Prism be my next pick, or something more defensive?