SSL is holding up well and looks set to prosper from new markets.
In uncertain and volatile markets, it makes sense to find stocks with earnings prospects that are relatively secure and unaffected by the economic cycle.
As markets get sold off aggressively, individual stock correlations tend to go up. In other words, everything gets sold off indiscriminately.
This can create buying opportunities but, you need to be confident about the prospects for its earnings. There is no point buying a stock that has been sold off, only to find out later that the market was right!
One stock that I think fits the bill is SSL International (LSE: SSL) and, I would look at SSL in order to trade in and out of, during periods of market volatility.
What does it do?
SSL has two core brands , Durex and Scholl, which make up the bulk of their sales. Condoms and feet care are relatively recession proof industries.
During any downturn, there may be some trading-down effect whereby consumers buy less of the premium Durex products in favour of cheaper products. However, this hasn't proved significant in recent history and there is another growth driver here which actually involves consumers trading-up. I'm referring to their aggressive expansion into emerging markets. This is attractive due to higher economic growth rates in these countries.
Furthermore, as Russian/Chinese etc consumers get richer and more discerning, they may well aspire to using Western products with a strong brand identity, rather than the local alternative.
To learn more about the business I would strongly recommend having a listen to the latest webcast on its website, which also includes a Q&A session. Why don't more companies do this?
A well run business
Clearly, SSL is planning on having good growth prospects because it recently restated its target "of growing EPS by 50% in the three years to March 2012".
SSL looks well set to easily achieve this, if you believe the consensus forecasts. I reckon SSL is a very well run business and has executed its plans well over the last few years.
Here are some key revenue and profitability metrics...
| Year to 31 March | 2006 | 2007 | 2008 | 2009 | 2010 |
|---|
| Revenue (£m) | 451 | 480 | 534 | 642 | 804 |
| EPS | 12.8p | 17.1p | 20.6p | 28p | 33.6p |
| EPS growth | 20% | 34% | 20% | 36% | 20% |
Figures exclude one-off items.
Gross margins have been around 60% for all five years shown above, peaking at 62.2% last year. Revenue growth has been good as well, although £132m of the increase between 2009 and 2010 was due to emerging market acquisitions (Russia & Ukraine). Underlying growth was a much more sedate 1.8%, but this must be seen in the context of a depressed economic environment.
SSL coped with the downturn rather well and continued to generate good cash flow and improve its operational metrics:
| Year to 31 March | 2006 | 2007 | 2008 | 2009 | 2010 |
|---|
| Net profit (£m) | 26.0 | 33.8 | 41.3 | 55.5 | 85.3 |
| Working capital / sales | 26.7% | 23.9% | 22.2% | 20% | 17.9% |
Net cash from
operating activities (£m) | 11.4 | 34.3 | 30.2 | 76.2 | 101.6 |
| Free cash flow | 2.9 | 25.9 | 21 | 45.4 | 87.1 |
| Free cash flow yield | 0.2% | 1.5% | 1.2% | 2.7% | 5.1% |
| Free cash flow / net profit | 11% | 77% | 51% | 82% | 102% |
For the above table, I used a share price of 800p and a market cap of £1.7bn.
This table shows us that working capital requirements have fallen as a percentage of sales. This has caused the increase in profits to drop increasingly into free cash flow generation. This is impressive, given their continued capital investment in expanding manufacturing in emerging markets.
Going forward consensus forecasts have EPS growth at 21% and 16% over the next two years, based upon pre-tax profits growth of 12% and 8.4%.
SSL is not superficially cheap, but investors should be willing to pay a premium for relatively secure growth in this uncertain environment. Longer term its prospects look positive and it offers the opportunity of capturing emerging market growth trends. In my view, that makes it the kind of stock to pick up on any short-term market weakness.
More on the markets:
