These stocks all have a superb track record of increasing profits.
Whilst the UK may not compare with the US in generating world leading technology companies, it does have a number of niche leaders within their own right. I think that SDL (LSE: SDL), Domino Printing Sciences (LSE: DNO) and NCC (LSE: NCC) fit the bill.
They are all highly cash generative with solid balance sheets and have demonstrated the capability to continue generating growth through the economic cycle.
After adjusting of working capital, they are all trading on free cash flow yields of around 7% All of them have a history of making earnings accretive acquisitions from their very strong cash flow generation.
Here's how their earnings per share figures have grown in recent years:
| | 2005 | 2006 | 2007 | 2008 | 2009 | (F) 2010 | (F) 2011 |
|---|
| NCC | 14.0p | 17.4p | 23.1p | 27.0p | 30.7p | 35.3p | 39.5p |
| Growth | | 25% | 33% | 17% | 14% | 15% | 12% |
| | | | | | | | |
| SDL | 8.2p | 14.5p | 17.7p | 25.0p | 29.0p | 32.0p | 35.0p |
| Growth | | 77% | 22% | 41% | 16% | 10% | 9% |
| | | | | | | | |
| Domino | 18.6p | 20.3p | 21.0p | 23.0p | 23.7p | 31.6p | 34.2p |
| Growth | | 9% | 3% | 9% | 3% | 33% | 8% |
Year ends are NCC (May), SDL (December) and Domino (October).
NCC
NCC is the largest provider of software escrow services in the world. The interesting part about software escrow is that its usefulness may increase during a recession.
Companies need to protect themselves against the risk that their software developer fails or doesn't complete his obligations. Indeed, the troubles at NHS software supplier iSoft provided NCC with good sales opportunities.
After the recession, NCC expects to increase prices and growth prospects look assured. This is a well run business that generates a lot of free cash flow which, in turn, has allowed it to make a string of acquisitions.
Despite the recent rise, I reckon it remains undervalued. NCC is relatively illiquid so the bid/offer spread can be a pain, but I think this stock could suit a long-term investor. It trades on a P/E of 13 for next year and the latest quote is 445p/455p.
SDL
SDL is the world leader in Global Information Management. It provides software and services in order to help companies create and maintain multilingual content. As such, they are a play on the increasing globalisation of trade.
One interesting point about SDL is that the bulk of its revenue is in US Dollars and they do not appear to hedge currency risk. This means that in 2009 -- with a strengthening dollar -- they were able to generate 8% headline revenue growth despite being down 11% at constant currency rates.
There are some fears over competition from Google's free translation service, but I suspect this will not prove significant as companies will not want to rely on such a limited service. SDL is a highly cash generative business, and currently holds around 14% of its market cap in cash.
The recent results saw a return to growth in their core language services division and margins look set to expand. Again, despite the recent rise I think it remains undervalued, although you will need to include a currency view in your investment decision. It trades on a forward P/E of 16.
Domino Printing Sciences
Domino is a leading manufacturer of coding and printing solutions to industry. It sells across a wide range of industries and its fortunes are tied to global production output. Around 40% of its revenues come from new equipment sales, with the remainder coming from consumables sales and services to existing customers.
The recent results were positive and I liked this statement: "New equipment sales volumes increased by over 30 per cent compared to the same period in 2009".
This should mean that sales of higher margin consumables are set to accelerate going forward. Provided the global economy remains on track, Domino should see good sales and margin growth. In common with SDL, it benefits from a weaker sterling rate.
Domino is a highly cash generative business, which olds over 7% of its market cap in cash. Furthermore, I've long felt that this is a potential takeover target since their UK rival Lynx Printing was taken out in a bidding war between Danaher and Illinios Tool Works. Its forward P/E is 14.
More share ideas...
> Lee holds shares in NCC, SDL and Domino.
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