A couple of new write-ups

I wrote a piece titled...

"Ashtead - 'making' or 'made' it happen?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

Meanwhile I also write a weekly news and views piece for the newly launched Global Dynamic Opportunities Fund. You can access this week's copy titled...

"Let it snow, let it snow, let it snow!"

...at this link here. 

A couple of new uploads

I wrote a piece titled...

"Hammerson to buy Intu - shopping centre madness?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

I also wrote a piece titled...

"DS Smith - packaging up a nice present for investors"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Boardroom shocker at the FTSE-100's GKN"

I wrote a piece titled...

"Boardroom shocker at the 

FTSE-100's GKN"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"DS Smith & Croda - UK companies doing the business"

I wrote a piece titled...

"DS Smith & Croda - UK companies 

doing the business"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

"I just want to say one word to you: Packaging"

I wrote a piece titled "I just want to say one word to you: Packaging" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Aggreko: supping at the temporary power share opportunity trough again"

I wrote a piece titled "Aggreko: supping at the temporary power share opportunity trough again" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"It is not all about the referendum today: DS Smith’s mega numbers"

I wrote a piece titled "It is not all about the referendum today: DS Smith’s mega numbers" which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here.

"Chris Bailey's share tip of the year number 2 - Buy DS Smith"

I wrote a piece titled "Chris Bailey's share tip of the year No 2 - Buy DS Smith" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Industrial stocks talk 2016: thoughts on the thoughts of GE and Honeywell

As I detail here I recently evolved from an overt buyer of General Electric (GE) shares to more of a holder as the shares pushed up above US$30/share.

Yesterday (Wednesday) when the world was musing about the Fed and related, GE was publishing some thoughts about 2016.  Given the 2015e EPS base is '$1.13-1.20' the 2016e 'operating framework' represents a good jump in no small way driven by the corporate base evolution aka cost simplification. 

As discussed in previous GE links however this was broadly expected.  Dig a little deeper and the still tricky backdrop can be deduced with - by my reckoning - three divisions showing an overt upgrade...and three showing a downgrade.  

  

GE is no mixed investment however.  It has strong market positions and an ongoing simplification plan as detailed in the presentation slide below.  Net net however did the company really say anything that new?  No - as shown by a share price still at US$30 and change.  

GE were not the only industrial company updating their 2016 thoughts however.  The other one was Honeywell who I have reviewed before on Financial Orbit most recently here with the observation:

The graphic which struck me however was this one which indicates some initial 2016 thoughts...which are predominately amazingly neutral across the range of Honeywell's businesses:

So what did their further updated 2016 thoughts indicate?  Well there was that neutral-ish tone to their underlying planning assumptions: 

I happened to listen to the thoughts of the Honeywell CEO on Bloomberg TV earlier today.  Essentially he noted a natural conservatism in their planning so as not to build up too many underlying costs.  A not unreasonable assumption.  He also noted it was not easy but via superior products, ongoing investments and controls of costs...he remained optimistic.  

And the forward quantitative guidance does remain reasonable on most of the key metrics.  

With a 6% free cash flow yield and x10.5 forward EV/ebit multiple the underlying metrics are reasonable attractive.  Of course there is the small issue of the uncertain 'neutralish' backdrop as I noted above but my instinct is to buy a starter position at a single digit EV/ebit forward multiple is justifiable.  Previously I cited this as a c. US$95 share price but now I would say in the US$97s.  As noted previously (see the link above) there is some technical support at/around this level: 

3M: nibbles down FY15e, shares plunge. Why?

The last time I wrote up the US bellweather 3M was back in July when I noted:

I think the issue with 3M is just pure valuation.  Near x15s EV/ebit is a little full given the range of other good industrial-centric conglomerates out there...Something closer to the one year low is a bit more interesting for this nevertheless quality company. 

After today's outlook meeting...just maybe we are getting closer to this point:

Why so?  Well in an environment described as 'positive but soft' the company nibbled down their FY15 guidance...

...even if they hope that FY16e would see either side of a 10% EPS year-on-year progression...

...plus generally organic growth (albeit it low single digit - EMEA being a notable exception no doubt influenced by a still disadvantageous US dollar)...

...and continued hope of growing the dividend (which now is moving towards a 3% yield).

So fair dues for the biggest multi-year daily fall in the stock price?  Well such is the way it happens when - as noted above - a stock is firmly valued.  I have a flag below a share price of US$140.  

Ashtead - still a rental grower

Back in early September I wrote positively about the UK listed plant hire business Ashtead noting:

'In short - and despite fears in the market - I see Ashtead as that rare sort of beast: a good value growth stock.  Yes a weaker US economy would not be good news but ironically the immediate impact would be stronger cash flow and utilisation levels, metrics the bears on the stock want to see improve. I still think a 1200p target is a reasonable expectation'

And since then?  Well the share has pushed up well from the early September lows including a good performance today.

Well you can see why...the key metrics are all pointing in the right direction and they nudged up hopes sufficiently to warrant the following comment:

With both divisions performing well, strong end markets and our strategy clearly working, we now anticipate a full year result ahead of our previous expectations and the Board looks forward to the medium term with confidence"

Looking at the results in more detail there was a good continuation with some of the trends identified in the prior report. Decent growth...

 

...and an inherently positive rental industry penetration trends...

...in an industry where the big are getting bigger: 

Within Ashtead's own business I note that they are continuing to grow their profile...

...whilst keeping physical utilisation rates up...

...and leverage rates are going down:

Other comments from the call included:

Said one more difficult comp quarter to go

Oil/gas falling to 2% revenues, 98% ‘going well’

Confident about US growth potential, UK post May/election slowdown been an oversupply during the summer but ‘all of that is coming back slowly…it is really a matter of timing’ 

Net net with a 33% increase in the interim dividend pushing the yield to around 1.7% the current sub x10 EV/ebit still suggests to me share price progression potential.  As aforementioned I talked about 1200p+ a share last time and that still seems to me quite reasonable before any need for a re-review.  I remain long.  

Electrolux - a failing GE deal but don't ignore the shares

A little under five months ago writing about the Swedish capital goods company Electrolux I noted:

'I like some of the trends here (pricing positive, happy to keep pricing up at cost volume) but buying here clear hope on US deal not only occurring but also adding value for them.  So a ‘trust management’ call especially with the shares trading at a mid-teens EV/ebit multiple.  

I would prefer wait for the full set of Q2 numbers in a few weeks time and maybe the c. SEK225 level where support where the shares have exhibited some historic resistance/support' 

(my additional emphasis added)

The above became hugely relevant today as the Electrolux/GE deal broke apart as noted on Fast FT here:

Electrolux shares have been spun around in a washing machine this morning after the Swedish appliance maker had its $3.3bn deal for General Electric's appliances business scuppered by the US Department of Justice.

The shares have fallen 14.5 per cent to SKr204.6 this morning. Before today, they had climbed 50 per cent over the last two years.

Electrolux will now have to pay GE a termination fee of $175m.

As I write the shares are off the 14.5% reduction lows...but are still not looking that healthy on a last 24 hour perspective down at a new 52 week low:

Now we all know the rationale for the deal: beefing up the US exposure in the light of general competitive challenges but - in the absence of such a transaction - we go back to the Electrolux business today (or at least as shown by the recent Q3 numbers).  SEK6bn+  of ebit profitability...

...and generally positive trends underpining the business (price-mix, cost savings etc.)...

...implies there may be a price to get interested.  At current multiples a low teens EV/ebit valuation is getting more interesting, especially when combined with a 2.7% dividend yield and generally good cash flow generation (5-6% free cash flow yield). 

The shares have tracked back to where they were before the GE deal was announced which means...they look interesting to me here.  

A useful insight as I pull together my top stocks for 2016 list over the next couple of weeks. 

GE - a quick Alstom deal sanity check

A quick update on General Electric after perusing their presentation on the Alstom power acquisition. I noted at the time of the former's Q3 numbers that:

'Net net I am still a believer in a US$30+ GE share price and will review my holding only at a share price above this level'

And guess where we are now?!

I wrote away from Financial Orbit that I was shifting to a more 'hold' centred position with the share above US$30 and I guess my observation with the Alstom deal metrics is just to make sure it materially does not impact the figures.  

First I note that the 'deal economics' have been impacted by the prolonged nature of the discussions although 'growth opportunities better than original outlook'.  From a surprise improvement the former observation sounds far more influential...

Meanwhile on the critical theoretical value add returns are greater than WACC by 2018 (my emphasis).  Hmm...that does not sound that exciting: 

Still got to see the final consideration worked out.  US$10bn odd is equivalent to c. 3% of GE's market cap.  And the initial boost to EPS?  5c odd a share (after some initial costs).  Well even ignoring the costs on a 'spend to save' medium-term basis, 5c is around 4% of the FY15e Industrial unit EPS.  In short that massively different from the proportional consideration.  

In short an ok acquisition but not mind-blowing.  All other matters being equal adopting a more 'hold' mindset to GE feels correct despite ongoing simplification and capital returns.  I just think the market is sort of there already and the story needs a new / not discounted leg.  

Been a great call however - and I do remain a 'holder' of a clear global leader. 

"Rexam – you ‘can’ believe in deal completion"

I wrote a piece titled "Rexam – you ‘can’ believe in deal completion" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Rolls Royce - as we were

Just over ten days ago I wrote an article on the struggling (five profit warnings in 18 months) industrial concern Rolls Royce observing:

Yes, there are no numbers for 2016, medium-term services revenues/profit guidance or comment on the sustainability of the dividend, buyback or even the current credit rating.  You can understand why investors have every reason to conclude they should leave this one alone. 

Two final thoughts however.  First remember that a few months ago ValueAct - the US hedge fund has become Rolls-Royce's biggest shareholder believing there is a significant cost cutting opportunity, an observation that the newish management are seemingly starting to share.

Second the company’s balance sheet is not dire.  It is certainly complex – including multiple currency hedges – but not dire.  My rough back of the envelope calculation puts the company in 2017 when cost and other challenges work through at around a x10 EV/ebit multiple with clear scope for a 5%+ free cash flow yield.  In normal times that would be value – and if you were a long cycle investor focusing on services revenues that is what you should conclude.  However for anyone with less than a couple of years plus timescale this is not a share for you.  Lumpy short cycle sales markets are giving you no visibility. 

No surprises that today's 'Group update' did not provide a definitive 'this is what we are doing' update.  More numbers and words on the plan/progress will be forthcoming at another capital markets day in six months or so.  The chairman set the tone with early observations including:

‘under no illusions’

‘we get it’

‘improvement in our financial and operational performance’

‘improve our internal controls…communication…absolute priority’

‘long term this is a growth story’ 

As for the core of the presentation from the newish CEO Warren East (formerly CEO of UK tech high flyer ARM Holdings) he said all the right things noting that over 80% of the business was in 'attractive growth markets'.  

Of course disproportionately this is focused on the widebody aircraft engine business where investors have hoped for this...

 

...but via a combination of poor company communication and the inevitable issues with lumpy businesses with 15-40 year cash flows (noted by the CEO akin to some of the charts shown in ARM presentations!)... 

...there has been too much surprise at patchy cashflows following new product introduction supplemented of course by those cyclical lumpy factors that have impacted the other divisions (marine, defence, business jets).  

To horribly summarise the presentation reiterated need to communicate effectively the sheer potential of the whole portfolio...as shown by the heightened cash flow of a matured widebody business (a further - and even more impressive implied cash flow chart - was shown for the 10 year period).  

Of course you cannot just hang around and wait for the cashflows. As the activist shareholder has noted refining the cost case is kind of sensible too.  There were not too many answers here - they will follow next year - but clearly you should anticipate much if any of a dividend as they transition.  

Yes the shares bounced (+3%) as there was nothing newly dire here but there is still everything to play for.  Stay in for the long term or don't invest at all.

What to think about Air Liquide's big deal

As I observed back in July:

'I have long regarded Air Liquide as your 'if you need to own an industrial Continental European listed stock then this is the one' name.  Today's numbers did nothing to change my mind.  Solid.

If you were going to pick a level?  Below Euro110 to buy some (more).  Yes, not cheap at teens EV/ebit, 2%/change yield but quality'

Last yesterday the company announced the proposed purchase of its US industrial gases peer Airgas.

Does this change anything?  Having listened to the deal conference call this morning I don't think so. Here are a few thoughts:

You can see the logic in terms of augmenting the market position for the Air Liquide group in the US and reinforcing the global position. 

Does make the company more US centred turnover-wise. 

‘Largest industrial gas market world wide…fastest growing amongst advanced economies’

Ultimately adds 25% to sales, 19% to operating income.  So need to achieve synergies etc. 

Financing looks like a bank loan etc. now and ultimately tapping the fixed income/equity markets. 

Believe will be accretive in year one.  Metrics not terrible even pre-synergies.  Certainly full but cannot fault general logic.   

From the Q&A –

2-5% first year accretion but depends on precise outcomes (cost of financing etc.)

‘very early…above the WACC for the group’

Airgas headwinds in the last year ‘the same as other firms’ – industrial slowdown etc.

Regulators on geographic profile – believe have planned for this drawing on historic precedent.  Noted gas cylinder business very local in orientation. 

Cash generation – said ran numbers on this deal carefully to ensure can invest in business, pay dividends and pay down debt

Overall – not surprised to see the shares down 5%+ given likelihood of an equity issue but you cannot really fault the industrial logic.  Very high quality but I have noted above a Euro120 pretty full today.  Always looking to buy this one below Euro110, that remains the case.