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By Bruce Jackson (TMFGoogly@aol.com)
The market always looks forward. That's one of the reasons it slumped yesterday, on fears of higher future interest rates both here and in the US. I try to look forward too when assessing a company's prospects, although I'm sometimes guilty of concentrating on past performance. This can work both ways.
Take for example British Telecommunications (LSE: BT.A). We all know they are already benefiting from the enormous growth in the Internet, so much so that total turnover for the first quarter of fiscal 2000 increased by 17.6%. That's very impressive given that sales in fiscal 1999 were just shy of £17 billion. However, over the past 5 years, BT's normalised profits have been stagnant. Given that their share price has virtually doubled in the last 18 months, it's not really that surprising that much of the future growth is probably already priced into the shares.
Another example is United News & Media (LSE: UNWS), mentioned in today's Foolish Lunchbox -- part of the new News aggregator area -- who've seen their share price rise 24% this year, yet their earnings have been stagnant for the past 5 years. Courtesy of their recent acquisition of a US publisher with significant Internet interests, the market is looking forward to future growth and profits from that exciting medium.
On the flip side, Qualiport laggard -- who'd have ever thought we'd be saying that? -- Rentokil Initial (LSE: RTO) has a great past record. For 16 years in a row it achieved earnings growth of at least 20% per annum -- a truly amazing performance -- but when it warned that 1999 profits were going to grow by a 'mere' 10--15%, the shares took a hammering.
Did I concentrate too much on the past and not enough on the future? Looking at the above 3 examples, it seems that short-term share performance often bears no relation to past achievements. I still firmly believe that the best companies out there are ones which are well managed, as judged by their past performances, and have future identifiable growth prospects. Of the three mentioned above, I would only exclude United News & Media. Although BT haven't grown in the past few years, I believe they actually managed the transition from monopoly to fully competitive global telecommunications company quite well. As for Rentokil Initial, the services industry still has much growth to aim for, even if not at the levels that particular company has seen in the past.
Finally, before moving on, on Monday I placed a rough valuation on BT of between 517p and 665p. I believe I may have been a little too conservative with my assumptions, so am going to revisit them in the next few days. Watch this space, and the Qualiport message board.
Looking forward, tomorrow is an exciting day, for our best performing investment, Independent Insurance (LSE: IIG) is reporting its interim results. Consensus pre-tax profit forecasts vary, but seem to be grouped in the range from £26m to £32m, up from £22.7m last year. At the top end of expectations, it translates into growth of 41%, not bad going at all, I think you'll agree. IIG have a pleasant habit of beating analyst expectations, and we already know there's been no single large insurance loss this year so far.
After approaching IIG, as a Fool and as a shareholder, they've kindly invited me to their post-results briefing and lunch at their London offices tomorrow, and I'll be delighted to attend. If I was to follow the lead of the Wise, I'd get into the Fool offices at 7am in preparation for the big event (fat chance!), quickly analyse the results (these things take a little time, especially for insurance companies), give a quick summary to my colleagues (none of them will be in the office either), give an updated strong buy/buy/accumulate/hold/reduce/sell recommendation (as if!), and finally dash off for the analyst briefing to be told the real story by the company. Sod all that -- my biggest concern is whether I can get away with wearing shorts and a T-shirt to the bash at the IIG offices.
I'll stick something about my experience up on the IIG message board tomorrow afternoon. Stuart Watson (TMF Tiger) will be taking the Qualiport reins on Friday, and I know he's already armed with a flotilla of past annual reports in preparation for dissecting the interim numbers. I'll update my IIG spreadsheet in the next week, and in particular will be playing close attention to their cash generation. My concerns and assessment of the situation are listed in this message board post of this April.
Yesterday, and today, Glaxo Wellcome (LSE: GLXO) briefly sank below our upper 1500p target price, but both days managed to claw its way above that point. I didn't buy, because firstly, under the Fool's trading rules I need to formally announce my buys in advance of trading, but also because I'd placed a relatively broad indicative buy range of 1300p to 1500p. Having updated my spreadsheet to reflect the first half Glaxo results and the subsequent downgrading of earnings expectations for the next 18 months, I've come up with a buy price I feel comfortable with of 1300p.
I fully realise that this is at the very bottom end of my initial valuation calculations, and that not that much has changed about the company in the past 6 months. After all, I'd virtually already factored the July profit warning into my calculations, particularly on the discounted cash-flow valuation. However, the shorter term outlook for Glaxo has worsened, and a fluffy white cloud has cast its shadow over the company's management, hence the valuation caution. It is worth reminding readers that Glaxo traded on an average price to earnings ratio (P/E) of 18 in 1996, much less than its current P/E of 30.
I could be accused in some quarters, including my own, of being too cautious and afraid of taking the plunge. However, if you just don't feel comfortable about an investment, you shouldn't buy it "just in case it appreciates" or "because it surely must recover" or whatever reason you put in your head. I may never buy Glaxo Wellcome, but there will be no crying over spilt milk. The shares may never get to 1300p. On the flip side, with the pharmaceutical sector going from strength to strength last year and the early part of this year, who'd have thought, at 2288p, we'd see Glaxo shares below 1500p in the space of six short months? Patience is a virtue in all things we do, but especially so with our individual share buys. Glaxo 1300p? Who knows, but I'll be hoping.
Hope your eclipse experience was dark, and that your Wednesday was fulfilling.
Company Change Bid DELL(US)-0.60 40.30 EMA +0.15 11.25 IIG 0.00 3.15 MSY +0.04 5.37 PIZ +0.15 6.80 RTO +0.04 2.25 ULVR -0.18 5.74 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 3.15 22.1% 17/04/98 169 EMAP 11.34 11.25 (0.8%) 22/04/99 347 Misys 5.76 5.37 (6.8%) 27/01/99 74 Dell (US) 44.63 40.30 (9.7%) 19/12/97 783 Rentokil 2.55 2.25 (11.8%) 04/11/98 245 Pizza Exp 7.93 6.80 (14.2%) 17/07/98 266 Unilever 7.53 5.74 (23.7%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2378.25 405.61 17/04/98 169 EMAP 2341.32 2272.50 (68.82) 22/04/99 347 Misys 2028.71 1863.39 (165.32) 27/01/99 74 Dell (US) 2007.42 1807.39 (200.02) 19/12/97 783 Rentokil 2046.53 1761.75 (284.78) 04/11/98 245 Pizza Exp 1966.34 1666.00 (300.34) 17/07/98 266 Unilever 2052.00 1526.84 (525.16) Cash: £3,433.46 Current Total : £16,709.59 Total Invested: £18,184.62 Profit/(Loss) : (£1,475.03) Value Per Share Day Month Year Qualiport 0.22% -1.55% -11.15% FTSE 100 0.60% -3.49% 2.24% FTSE All Share 0.47% -2.93% 6.19%