It was another one of those 'drifty' mornings, despite the fact that a bundle of the UK's premier mid-caps released some impressive new figures today. And the latest bit of ammunition in the 'rip-off' Britain saga has been fired by Which? magazine. Their latest survey discovered that the major high street banks "offer appalling value for money" across a wide range of standard products, and they criticised some for their "constant mediocrity". We don't think that should come as a major surprise to anyone.
The US markets had a see-saw day yesterday as a key economic indicator was released a day early by mistake. This boo-boo was courtesy of the National Association of Purchasing Management. However, they still lag the Bureau of Labor Statistics who managed the same feat twice in two months last year.
The sticky gold star for this morning goes to Matalan(LSE: MTN), the out of town discount retailing chain. Its shares rose 155p to 1037.5p as it released bumper interim results. These showed like for like sales up 15%, but in the last eight weeks they have improved to a staggering 25%. But for how long can that be sustained? Matalan is looking to move into financial services and has also, just today, launched its website.
Second prize goes to CMG(LSE: CMG), who reported both turnover and profit for the half year up by 50%. However, they expect growth for the full year to be below that of 1998 (46%), but higher than industry average. This is the first of the UK's major IT companies to report its latest results. No doubt the press will scour for evidence of a short-term blip due to Y2K issues and, as usual, completely ignore any long-term fundamentals (saucer of milk for Tiger, please). CMG rose 78p to 1935p. The general bullish comments also resulted in Logica(LSE: LOG) rising 43p to 805.5p and Misys(LSE:MSY) adding 16.5p to 567p.
GKN(LSE: GKN) was the best performing blue-chip as SG Securities recommended the stock as a 'strong buy'. This was on the basis that the share price has underperformed the rest of the market by 11% since its latest results were released four weeks ago. The shares duly obliged by adding 47p to 1000p. I wonder how they can tell that it wasn't just the rest of the market outperforming GKN? Then again, isn't GKN part of that market anyway? Ah, the ways of the Wise.
Bodycote(LSE: BOY) was another mid-cap flexing its muscles this morning as Dresdner Kleinwort Benson upgraded the shares to a "buy" as a result of the price falling 25% in the past month. Again, the shares duly obliged, rising 20p to 351.5p.
In yesterday's Conquerors report for the Daily Fool, we noted that if a company wanted to add 50% to its share price, all it had to do was appoint Archie Norman to its board of directors. Looks like we underestimated Archie's power. Today the price of French(LSE: FRTH), the company concerned, rose another 13p to 75.5p, taking the increase over the last two days to almost 80%.
Pharmaceutical giant SmithKline Beecham(LSE: SB.) continued yesterday's drop with a further fall of 20.5p to 790p following news that approval of one of its new drugs will be delayed.
Clothing retailer, Monsoon(LSE: MSN), isn't having a happy year so far. Today it reported like for like sales down 7% -- perhaps Matalan pinched them? This resulted in a 26% drop in pre tax profits despite an overall increase in turnover. However, the company says the start of its new financial year has been "encouraging" and it still intends to open a further 30 shops. This didn't stop the shares falling 9p to 76.5p.
Racal Electronics(LSE: RCAL) dropped 14p to 362.5p as the market continued to wait for news of possible disposals, bids or break-up proposals. The speculation centres on the fact that Racal's boss, Ernest Harrison, would like to retire with a flourish. It is difficult to see him repeating his finest moment, the demerger of Vodafone(LSE: VOD), when Racal was threatened by a hostile takeover by Williams(LSE: WLMS). Have you any more jewels in that crown, Ernest?
The chemical sector, yuck! Not a place where you find too many Foolish investments. Hickson International(LSE: HKSN) dropped 5p to 52.5p as it revealed a 40% drop in first half profit and a warning that the second half of the year would "significantly" affected by the destocking of one of its major agrochemicals' customers. Oh dear, oh dear, oh dear.
Baker Street, London -- Guardian iT(LSE: GRD) is an international business continuity and disaster recovery specialist. In layman's terms, an example best describes my understanding of what they actually do.
I'm an IT manager (I told you this was an example!) of a bank, and my company has many business-critical computer applications running every day -- everything from the software that processes new mortgage applications, to the more important automated teller machine (ATM) equipment. The bank, in order to provide its customers with the best service possible (like that really happens!), needs to supply a 24 hour uninterrupted service. As the IT manager, that's my responsibility.
A massive fire in the bank's IT server housing area is my worst nightmare, followed by a flood initially caused by a leaking toilet on the 14th floor. Each scenario means my entire computer system 'goes down' (I'm technically challenged) and the bank is effectively paralysed. As my job is on the line if this happens, even if it is not my fault that someone over-flushed the toilet on the 14th floor, I will damn well make sure that I've got some IT backup in place.
This is the cue to call Guardian iT. They provide off-site computer and data backup facilities, which can be invoked during a disaster situation, meaning my bank can continue to operate an almost continuous service for employees and customers alike. This is despite the fact that the in-house server room is awash with unmentionable objects courtesy of the flood. This backup service costs my bank a lot of money, but they are willing to pay for this peace of mind, all the while hoping that the real disaster recovery service is never really required. It is essentially an insurance policy, yet Guardian iT are not responsible for the claims.
Sound like a good business model? It does to me, and these are borne out in Guardian iT's interim results for the 6 months to June, announced this morning. The highlights are;
* Sales +43% to £19.6m
* Operating profit +23% to £4.2m
* Earnings per share (EPS) +21% to 4.8p
The first thing that jumps at me from the above numbers is the implied fall in profit margins, as sales growth is well in advance of profit and EPS growth. However, Guardian is at pains to point out that this reduction in margins by no means represents a dilution of profitability profiles of the existing streams of business within the group.
They are very much in the expansionary stage of their development, and have continued to accelerate their investment in buildings and equipment, including spending £7m on a new Docklands facility. Importantly, these investments are being made to accommodate further future rapid growth, and not simply to maintain the existing service. This is what many Internet companies are doing as they rapidly expand -- invest today for a pay-back in the future -- except they are making losses and are generally valued much higher (relatively) than Guardian.
The economics of the disaster recovery business, to my somewhat limited 'inside' knowledge of the industry, appear to be quite attractive. There's the relatively big initial capital outlay on buildings and mainframe computers, but once that's set up, each incremental customer adds significantly to profits. Disaster recovery situations are relatively rare, so again to my simple way of thinking, one Guardian mainframe computer can service a relatively large number of customers. After all, unless there really is a major catastrophe such as an earthquake or long-term city-wide power failure, the chances of simultaneous computer failure by many of Guardian's customers is about as likely as me winning the lottery, and I don't play it!
Adding to the attractiveness of the business model, Guardian have a very transparent forward contracted order book, which currently stands at almost £80m, an increase of 59% over the same time a year ago. The balance sheet has deferred income of £16.6m, representing cash received up-front from customers for services not yet rendered. Stock balances are zero, as Guardian iT are not a widget manufacturing or selling company. These are traits of companies with excellent business models.
After all this praise, there must be some downside, because there is no perfect company. Before diving in, investors should be aware of Guardian's competitors. Despite the company's reassurance to the contrary, could it be that margins are deteriorating because of competitive pricing pressures? Operating margins of over 20% will inevitably attract competition. Also, as was pointed out in this message board post of some time ago, applications outsourcing could hit Guardian's business model hard.
Finally, at 637.5p, the shares trade on a premium forward price to earnings ratio (P/E) of 57. It seems I'm not the first to notice the potential of Guardian iT. However, investors who are satisfied with the company's competitive environment might want to consider Guardian, especially during one of the stock market's intermittent speed wobbles. The shares were as low as 277p in the latter parts of last year, and 483p earlier this year.
Don't forget the Foolish social event this evening, at the Barely Mow pub in Dover Street, London.
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