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Browsing the news section for Next Plc yesterday uncovered a nasty surprise. Yet another Motley Fool article that scratches a few metrics of a stock then deems it a buy…

Browsing the news section for Next Plc yesterday uncovered a nasty surprise. Yet another Motley Fool article that scratches a few metrics of a stock then deems it a buy or sell. This week was the turn of Next, which I find interesting as a shareholder. Royston Wild notes;
“Like Tesco, clothing colossus Next (LSE: NXT) is also being battered by a backcloth of rising competition and the need for savage price cuts.

Competitive pressures have been a particular problem for the retailer’s Next Directory catalogue division, which stole a march on the rest of the high street with the early embrace of e-commerce. But its rivals have invested heavily in this growth channel more recently, giving Next a run for its money.

And I expect revenues at Next — which has already disappointed investors with profit warnings in recent months — to struggle still further as a probable lurch into recession quells British shoppers’ demand for new clothes, and drives footfall at cut-price operators like Primark and H&M.

I reckon Next is an unattractive stock selection at the present time, even in spite of a conventionally-decent forward P/E ratio of 12.4 times”

What Mr Wild isn’t taking into account here is the financial metrics of Next, its superior margins and the ability of management to deal with change.

Sector
There’s no doubting that the retail sector is full of competition, and although Next Plc is noting tough trading conditions their lean approach to operations enables them to operate at an operating margin of 20%. Next also have a history of growing EPS despite tough conditions with a growth from £2.51 per share in 2012 to £4.43 in 2016. Mr Wild notes that a squeeze on the spending of Brits will drive customers to low-cost competitors such Primark and H&M but he fails to note that we’ve been here before!

Think of the biggest recession of recent memory – 2008. How did Next perform? Whilst it’s true that sales suffered with like for like retail sales down 7% the company proved its durability by maintaining its dividend payments and keeping a robust balance sheet. Next is a company that has performed exceptionally well since it flirted with bankruptcy in 1998 and the lessons learnt then still shape the company today.

Next Directory

Mr Wild notes in his article that competitors are finally starting to catch up with Next directory. Many may also be fearful of online competition from online only retailers such as ASOS. Whilst it may be the case that competitors have caught up and it may appear that this has had a negative effect on the performance of Next directory the figures paint a different picture. In fact, Next directory sales increased by 8% between 2015 and 2016, with Next retail also growing by an admittedly anemic 1%. The online retail sector is going to continue to grow and I see no reason why Next can’t compete and continue to grow its Next Directory sales.

Future EPS growth.

This is admittedly a worry for the company as it competes in a tough market and with the company already lean it’s hard to see how growth could be achieved through greater efficiency.

I expect Next’s growth to remain steady over the coming years as they fight to defend their market share. I don’t expect Next to flourish, but I certainly expect it to be solid and sound until consumer spending picks up.

Value

What’s great about Next is that management loves to buy up its own shares when they feel they are undervalued, usually at or under £65 a share. Showing that their confident in their performance and that the company has access to cash if needed. The share price currently sits at £54 a share, sporting a low p/e ratio of 12.2 given that the company was trading at 17.6 times earnings in 2014 and 17.3 times earnings in 2015.

Dividend

This is what really attracts me to Next plc. The dividend payout ratio for the stock in 2016 was only 36%, meaning that the company is comfortably covering its payments and has plenty of room to increase the payout ratio to maintain the dividend over the coming years even with weak EPS growth.

The current dividend yield on offer is a decent 2.9%, nothing to get excited about but better than a bank account in the current environment, one must also consider the company’s habit of paying a special dividend with its spare earnings when it considers it share the price to be overvalued. This year they paid a juicy special dividend of 60p. Whilst investors should never expect special dividends, they’re always a bonus and can help boost your dividend income. For illustrative purposes, if we included the special dividend it would give Next a yield of 3.8%.

Summary

Whilst admittedly Next wasn’t my wisest buy ever, I certainly wouldn’t tell investors to ‘avoid at all costs’. Next has a great management team that came through 2008 and I have full confidence in their ability to come through any coming recession, we might even see a few less lean competitors suffer! Yes, competitors have significantly improved their online offering but that doesn’t mean that Next directory can’t continue to grow in a growing market.

Next deserves its place in my portfolio and I will only sell if managements attitude towards the dividend changes or if its fundamentals deteriorate significantly.

Disclosure: Long NXT

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Weekly share tip.

Weekly share tip: Why I bought Greggs, even though I don’t see much value

lewys

16th August 2016 8:34 am 16th August 2016

1 Comment

Usually, I don’t dip into the FTSE250 looking for purchase opportunities but with the usual dividend growth stocks trading at high valuations (See MCD and JNJ for just two examples)…

Usually, I don’t dip into the FTSE250 looking for purchase opportunities but with the usual dividend growth stocks trading at high valuations (See MCD and JNJ for just two examples) I felt the need to search elsewhere for some value.

Last week, I analysed Britvic PLC, and my dividend discount model showed that the company was potentially 10% undervalued, well today it’s time to take a look at another FTSE250 stock – Greggs Plc.

One thing that really stuck with me from reading Jason Feiber blog in my early investing days was the need to understand what a business does. Well, with Greggs it really doesn’t come much easier to understand. Greggs sells pastries, and Brits love pasties. In recent years Greggs has also diversified its business from a traditional bakery to a food-on-the-go retailer that offers anything from a pasty to pasta, there is even talk about the company branching out into stocking Sushi! Greggs has also moved swiftly with consumer trends by introducing ‘Balanced choice’ products which contain around 400 calories.

Greggs is present on most UK high-streets and has also been successfully expanding into motorway service stations. Overall Greggs now has around 1,700 stores with plans to expand to 2,000.

With it’s share price down 13% year to date, and nearly 20% since January, is now the time to buy?

Value

At nearly 19 times earnings the stock appears expensive, and taking look at its historical p/e ratio we can immediately see that the stock has traded at far lower multiples in the past. It traded for 12.5 p/e in 2010 and 11.4 p/e in 2011. but by 2014 the stock has skyrocketed to multiples of 19.9 and in 2015 the stock was trading hands for a ridiculous 23.5 times earnings, namely due to lower EPS.

I absolutely hate paying above fair valuation for any stock, so why on earth is Greggs in my portfolio?

Why buy at a relatively high multiple?

In 2013 Greggs appointed a new CEO who embarked on an ambitious shift in strategy in order to aggressively target a growing food-on-the-go market. The company quickly shifted the format of their stores by focusing on a new bakery food-on-the-go format that has proven to be very popular with consumers. The company also quickly re-launched its improved blend coffee range in 2014. That coffee ended up being its fastest growing product.

Greggs is now uniquely placed in the food-on-the-go market with its ability to offer hot or cold products and fresh coffee for a competitive price. This really sets the company apart from competitors such as supermarket chains due to the freshness of the offering and from high-end competitors such as coffee shops by its pricing. The shift in strategy has evidently paid off with EPS growth of 42% between 2013-2014 and further EPS growth of 29% from 2014-2015. Whilst we don’t have a mystic ball to predict future growth we can be confident in the company’s plan moving forward in an industry that’s growing 9% annually.

Minimum wage advantage

In addition to this, Greggs has a step up on its competition in relation to costs. With chains such as Costa announcing that they will have to raise prices in order to pay staff the new £7.20 minimum wage, Greggs already paid staff £7.11 an hour meaning that they can maintain prices.

Dividend

Greggs currently has a dividend yield of 2.72% which isn’t bad, but nothing to get excited about. But what really does excite me is the company’s commitment to grow the dividend. The company managed to grow its dividend by 30% from 2014 to 2015 with a juicy special dividend of 20p per share.

There’s no doubt that Greggs struggled before its turnaround but it was still committed to annual dividend increases and even increased its dividend during the financial crisis of 2008. It has now increased is dividend every year since 1999, bar a freeze between 2013-2014 where it maintained its payout in order to fund the turnaround.

With a payout ratio of 52% there is also still room for maneuver to increase the ratio should sales somehow disappoint.

What about fair value?

It’s really hard to find a fair value for Greggs simply because we don’t know if the turnaround will continue to deliver such outstanding EPS growth. It’s currently 2 years into its 5-year turnaround plan and I don’t know a psychic in order to help me predict the future. But, what I do know is that the first two years have been successful and management seem worth their wages from what I’ve seen so far.

I’m not going to put a figure on this stock but am happy in owning its dividend factory at an ok yield with a steady dividend growth history.

Summary

Dividend growth investors look at companies that have a history of annually increasing their dividend and Greggs has certainly proven its ability to do so. With a successful turnaround in full flow and an enviable position in a growing market I can see no reason why Greggs can’t continue to pay me dividends. This stock won’t be a core holding in my portfolio and I’ll be closely monitoring its turnaround progress. Should its success continue and EPS continue to grow I’m looking forward to some nice dividend paydays!

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Investing Mistakes

A dangerous mistake that even experienced investors make.

lewys

12th August 2016 5:08 pm 12th August 2016

1 Comment

No-one is perfect and even the most experienced of investors make mistakes, and one mistake that I see time and time again is buying into hype and forward valuations. …

No-one is perfect and even the most experienced of investors make mistakes, and one mistake that I see time and time again is buying into hype and forward valuations.

I’m not going to name names – but I have seen countless articles and countless analysts deem stocks ‘obvious’ and ‘stunning’ buys based purely on projection.

Only today I saw an analyst call Cineworld Group plc a stock that “fully merits a slightly-elevated forward P/E rating of 18.1 times”.

But how do we know that in one year Cineworld will indeed achieve its forecast earnings? Maybe it’ll be higher, maybe it’ll be lower, who knows? But we must remember that tens of analysts that evaluate stocks. Some place Cineworld’s estimated EPS for 2016 at 34.2p a share giving you a forward p/e of 17.5. Some place Cineworld’s estimated EPS for 2016 at 30.68 giving you a forward p/e of 19.5. Who knows which analyst is correct?

One thing we do know and that is that the stock currently trades at a s p/e of 19.62. Definitely overvalued for a cinema chain!

But Analysts are professionals, surely they get things right?

You would think so but this couldn’t be further from the truth. Analysts use a range of different methods and take a range of different views on stocks in order to estimate anything from price targets to earnings. If analysts really had the market figured out, why do their valuations vary and why did many close due to wrong predictions during the 2008 market crash?

If we take an extreme example of how wrong analysts, predictions and hype can be we don’t need to travel further back than 1999 and the dotcom bubble for some perfect examples.

During this period the US stock market’s p/e rose to 32 and many tech stocks with negative EPS were trading at p/e of over 100 simply because they sounded cool. We’re only now seeing tech companies like Microsoft and Verizon return to their 1999 levels – 17 years later, after trading hands at ridiculous valuations at the bubble’s peak.

In 1999, Wall street was buying with both hands and analysts predicted never-ending EPS growth of 100’s% yearly until the bubble burst in early 2000. But, those looking at the facts during this period could see that such valuations were ludicrous and the EPS projections farcical and were spared the losses that bankrupted many investors.

How about an example of these valuations?

Let’s take Yahoo – on January 3^rd 2000, Yahoo shares closed at an all time high of $118.75 per share, doubling in price since December 1999. Their earnings per share for that year came out at $0.05 putting the company’s valuation at 162x earnings. On September 26 2001 their shares were worth just $8.11.

Current examples of irrationality

I often get criticized by friends and colleges for not buying in to ‘stocks of the future’ a few names that instantly come to mind are – Amazon, Netflix and Tesla.

Well let’s look at the facts,

Amazon trades at a p/e of 192 (ttm). It’s EPS were negative for 2012 and 2014. Even if I took the highest analyst estimates for EPS in 2017 of $15.55, purchasing the stock today for $770 would give me a p/e of 50. There’s absolutely no value in the stock at this level.

Tesla hasn’t recorded a year of positive EPS figures yet, has a net loss of $886m worldwide yet astoundingly trades at a valuation of $226 per share!

Netflix on the other hand has a p/e ratio of near 300 (ttm). But I’m sure it’ll all be ok because the company is expected to earn 0.89c a share in 2017 up from the 0.25c per share the company recorded in 2015. Even if we took the highest estimate for EPS in 2017 which is $1.38 this would give us a p/e of 69 in 1.5 years time.

Conversely, I could buy Walmart today, for 16.33 times earnings and receive a 2.71% yield and annual dividend increases for the foreseeable future. There’s no mystic ball needed here. These are facts.

Lesson

When you’re buying a stock, you’re buying a part of a company. You can sell your part of that company to Mr Market whenever you like – for the price he offers. But, one thing you should learn is that Mr Market is sometimes (often) irrational and can offer you ridiculous valuations for your part of a company be it to little or too large a valuation.

For example, If you went to a car dealership and bought a car you knew was worth £1,000 for £1,000 and parked it outside your drive, you would be content in knowing you have a £1,000 asset sitting outside your house. So, what would you do if Mr Market knocked on your door and offered you £500? You wouldn’t sell it of course, knowing full well your car is worth £1,000.

But, what if when you went to the car dealership and the salesperson said to you;

“I know this car is only worth £1,000 today, BUT our dealership, and other dealerships estimate that this car will be worth £5,000 in three years. I tell you what, I’ll give it to you today for just £2,500.”

If you bought that car and parked it outside your drive, how do you know that Mr Market will knock on your door in three years and pay you £5,000 for it? How do you know that that car will indeed appreciate in value at all?

The mistake would be to buy the car for £2,500. The mistake investors often make is to buy a stock for well over the market/sector’s average p/e in the hope that the analysts were correct when they projected forward earnings.

I must admit that I have indeed done this and it didn’t end well. I’ll be writing an article on my mistake this Monday. Have you ever made this investing mistake? Comment below.

Disclosure: I have no positions in any of the stocks mentioned and no intention on initiating a position within the next 72hours.

All figures taken from ft.com

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Frugal living

Could coffee be costing you £806 a year?

lewys

11th August 2016 9:43 am 11th August 2016

1 Comment

Coffee is a booming business. You can’t walk 50m down a high street in the UK without seeing a coffee shop. With a plethora of chains, Costa, Starbucks, Coffee #1…

Coffee is a booming business. You can’t walk 50m down a high street in the UK without seeing a coffee shop. With a plethora of chains, Costa, Starbucks, Coffee #1 e.t.c it’s so easy to depart with your hard earned money for a quick treat. Even Greggs is now serving coffee (not too bad either) and the expansion of McCafe by McDonalds only adds to the growing temptations.
Quick treats often turn to habits and before you know it you’re grabbing a coffee every time you’re in town and on your way to work – at around £2.50 – £3.00 a time (more if you enjoy some iced drinks) this habit becomes an expensive one.

From premium coffee to expensive hipster trends, it’s becoming abundantly clear how easily and mindlessly many millennials hand over their hard-earned money. Coffee may well be the biggest leech to millennial wallets.

Let’s talk about cash. How much money could you really be spending yearly on coffee? Well, that depends on how many times a week you buy coffee from a chain such as Starbucks and what drink you order. For guidance;

A medium latte from Starbucks costs £2.70;

One coffee a week = £140
Two a week = £280
Three a week = £421
Four a week = £560
Five a week (one every working day) = £702

A large coffee (£3.10 a coffee at Starbucks) would cost you £806 a year!

You could really be spending £806 a year if you bought a large coffee from Starbucks every working day.
Keep in mind that these figures don’t include any extra spend on toast, buns and cakes!

How to buck the trend.

I used to drink at least three cups of coffee a week from premium coffee shops meaning that I spent £421 a year on coffee (probably more because I got addicted to caramel slices). Money that could have been spent on a trip, debt, my loved ones or more than likely a stake in a dividend growth stock.

Addiction is hard to beat but I managed to reduce my coffee intake to around once a fortnight by simply ‘charing myself’ for coffee.

Every time I would want coffee from Costa/Starbucks e.t.c I would open the internet banking app on my phone and transfer £2.70 from my current account into my savings account. To my amazement, this was very motivating and before I knew it I was transferring myself money for many things that I was tempted to buy;

When I wanted a can of coke – 70p transferred

When I wanted some Ice cream – £1.50 transferred

When I wanted a take away – £12 transferred

(It’s actually quite empowering!)
This isn’t to say that you shouldn’t enjoy these things. But I find, you can enjoy things more if you save them for when you’re enjoying a nice day, doing things you love with your loved ones and not on your way to work. Even better, enjoy these things when you retire in your 40s from saving all this money and investing it in high quality dividend growth stocks!

Another thing I started doing was simply switching where I drank coffee. A medium latte in Starbucks is £2.70. A medium latte in McDonalds is £1.69. Although I can fully admit that McDonalds coffee is not as good as Starbucks coffee it’s not that far off and definitely better value for money. After all, a £3 a week saving is a £150+ saving yearly.

Save yourself some money, change your coffee habit and start spending your money on the things you really value.

If you’re interested in the growing UK coffee market I found this article from the financial times very insightful: http://on.ft.com/2aUFden

1 Comment

value

Does Britvic (BVIC) offer value in an overpriced market?

lewys

10th August 2016 2:31 pm 10th August 2016

9 Comments

While a confident bull market coupled with economic growth encourage riskier investments in sectors such as bio-tech and tech, conversely, any market panic (Brexit + lower forecast economic growth) tends to encourage investors to flock to safer, more predictable industries such as consumer staples and pharmaceuticals, after all, people always have to eat and drink!

If we are to look at the current economic climate things are far from certain in the UK. We are faced with low interest rates, a forced stimulus package from the BoE and the uncertainty of a British exit from the EU. This climate has undoubtedly driven investors to stocks such as Unilever, Reckitt Benckiser and even Nestle which are seen as safer investments. This means that it has become increasingly difficult to find value in the current market.

For example,Reckitt Benckiser is sporting a p/e ratio of 34, Nestle of 26 and Unilever of 24 meaning that investors are paying more for steady earnings. Whilst I still consider these stocks solid investments, it’s hard to see value for money at such valuations.

Having scoured the FTSE100 and FTSE250 to try and find value in the sector I came across Britvic PLC which I feel offers significant value to investors. Britvic Plc is a United Kingdom-based soft drinks company. The Company offers sparkling sodas, juice drinks, ice tea, squash, syrups, mineral waters, mixers and energy drinks. The Company operates through five segments: GB stills, GB cards, Ireland, France and International. The Company manufactures, markets and sells its range of brands, including Pepsi, 7UP, Lipton Ice Tea and Mountain Dew.

Britvic’s shares are down 11% over the past year on a cocktail of worries including the UK’s decision to impose a sugar tax and a slow start to the year with lower than expected revenue. But these are all short term pressures and the company can certainly adapt to such legislation.

With a p/e of just 15 and a progressive dividend policy with a 10 year streak of increasing dividends (bar a freeze between 2011-2012) This stock looks appealing, so let’s take a closer look.

The dividend

Britvic’s dividend payout ratio currently stands at 55% with a dividend cover of 1.8. Whist not excellent, this is a decent ratio meaning that the company has its dividend payments well covered. Given that the company follows a progressive dividend policy I can certainly see room for an increase in the dividend payout ratio in order to continue to increase the dividend in the short term if results disappoint.

The stock also offers a juicy yield of 3.7% – certainly not bad.

Any red flags?

One criticism of Britvic and a potential reason as to the low current valuation is the level of debt it carries. I am slightly concerned at the debt Britvic currently holds with a debt to equity ratio of 2.8 the company appears highly leveraged, especially for its sector, although this ratio has declined over the past 5 years due to an increase in assets and the debt is also well covered by earnings (5.1x). I would still be comfortable buying in at this level buy would certainly like to see a reduction in debt over the coming years.

Also, unlike other stocks mentioned in this article Britvic does lack diversity in its portfolio. I must emphasise that Britvic’s brands are restricted to the beverage industry and as such offer less security than diversified conglomerates such as ULVR.

Value

For me, Britvic PLC offers outstanding value in this overpriced sector. With a p/e ratio of only 15 and a history of a continued increase in EPS I feel that this stock is significantly underpriced by the market.

Using a dividend discount model I calculated a fair value of the stock as follows;

Britvic has managed to increase its dividends by an average of 6.61% over the past 5years. With an upward trend in EPS and room in the payout ratio I see no reason why we can’t conservatively estimate a yearly dividend growth of 6.6% for the stock going forward based on these factors.

I also factored in a discount rate of 10% accounting for the risk the debt poses and the relative uncertainty of this small cap stock compared to peers.

The equation – Price = Estimated value of next year’s dividend (1)/(discount rate – Dividend growth rate) gave me a fair value estimate of: 676.47p per share.

This means that according to my analysis this share appears 10.7% undervalued.

Disclosure: I currently hold no position in BVIC but do intend to initiate a position over the next month if capital allows me to do so.

9 Comments

Investing Mistakes

Top three investing mistakes.

lewys

9th August 2016 2:33 pm 9th August 2016

No Comments

During my series – investing mistakes, I will cover a range of mistakes that anyone from a beginner to seasoned investor may make. Where I can, I will provide real…

During my series – investing mistakes, I will cover a range of mistakes that anyone from a beginner to seasoned investor may make. Where I can, I will provide real life examples of such mistakes (often at my own expense) so you can avoid them.

I’ll begin with the top three mistakes for beginners.

1. Buying because it’s busy.

One of the worst investing stories I ever heard was from a work colleague.
He told me that he had recently bought shares in HMV group. Why? – Because he went to buy a few things from their Swansea store and it was really busy. It’s really important to remember that busy stores don’t equal profits and they certainly don’t equal financial stability.

Companies with busy stores could have poor margins due to pricing pressures, high levels of debt or even be on the verge of bankruptcy, as was HMV. Whilst in 2011 HMV stores may well have been busy it has massive debt and had to close 60 stores in order to reduce its debt pile. It later sold Waterstones for £53mn to try and further manage its debt pile. By 2013 administrators had been called in to try and save the ailing busnes.

ALWAYS check a company’s fundamentals before buying and don’t get sucked into hype.

This seems obvious to many but unfortunately this rationale for buying stocks is often quoted by many of my colleagues and friends.

2. Buying based on future earnings projections.

I have to admit, this is one mistake that I myself have made. If you take the time to look at my portfolio page you will see that I have a position in Whitbread. My rationale for initiating this position was, in reflection, considerably flawed.

Why did I buy Whitbread? I had just received a tax rebate and had some cash I seriously wanted to invest. Having scoured my watchlist I took a closer look at Whitbread and got suckered in by the future earning projections that analysts were making for the company. I saw consensus EPS of 3.06 for 2018 and then calculated the forward p/e ratio to 16 based on the £50 per share price tag.

I plunged into the shares recklessly happy with the ‘value’ I was getting for these notoriously expensive shares in full confidence that EPS would indeed grow. In fact I was buying in at an expensive p/e ratio of over 21 and was essentially ‘betting’ that the company would perform,

Needless to say, projections don’t equate to earnings – something clearly pointed out by Benjamin Graham in his book, The intelligent investor. A few downwards revisions later and my shares are worth closer to £40 each. Although the dividend investor inside me is quick to emphasise that a stock’s price doesn’t affect the income stream I get from it the value investor inside me is quick to point out that I significantly overpaid for the stock.

Although I’m still confident owning the shares, it is abundantly clear that I paid over the odds for my stake. I paid around 21 p/e which was a much more expensive multiple than its historic average of around 16.

3. Buying because ‘you think’.

Another mistake that’s often made is purchasing a stock because you own a crystal ball. I have too many friends who have bought shares in companies such as Tesla and countless green energy shares because ‘that’s the future’.. right?

Although it may be true that green energy will eventually replace fossil fuels that doesn’t mean that the shares on offer in that sector are worth the high p/e multiples that some sport. Always be careful before buying a share in any sector and don’t just buy a share because it’s in a sector/niche that you think will be successful – there may be better peers.

Make sure your rationale is secure before purchasing a stock and don’t rush in because of your preconceptions. Always do your homework and don’t think you ‘know’ anything because of a few headlines you read in a newspaper or from conversations with your friends.

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Don’t doubt Next Plc. Why I think the Motley Fool is wrong to be so bearish.

Weekly share tip: Why I bought Greggs, even though I don’t see much value

A dangerous mistake that even experienced investors make.

Could coffee be costing you £806 a year?

Does Britvic (BVIC) offer value in an overpriced market?

Top three investing mistakes.