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By Bruce Jackson (TMFGoogly@aol.com)
WPP Group (LSE: WPP) is a company I've been following for quite some time. I've previously mentioned it in this space, as I've considered adding it to the Qualiwatch list. As a re-cap, Qualiwatch aims to firstly identify excellent companies, and secondly to place a buy price on those companies. This portfolio is looking to buy shares in quality companies that pass our long-term aim of 15% appreciation per annum. With world equity stock markets at traditionally high levels, the valuation part of the equation becomes quite difficult to achieve.
Here's the current Qualiwatch members, complete with target buy prices.
Glaxo Wellcome (LSE: GLXO) -- 1300p
Vodafone AirTouch (LSE: VOD) -- 1050p
I'll be looking to add WPP to that list in the near future. My current gut-feeling says that the shares are fully valued (sounding a bit Wise for a moment -- sorry), so there's no great rush to value them. Besides, before I do that, I have to be satisfied that they pass our first 9 Qualiport company criteria. I'm thinking they'll do that with flying colours. For more on WPP's first half results, check out today's Foolish Lunchbox, on the site each market day by 12.30pm.
I've been invited to the Rentokil Initial (LSE: RTO) interim results analyst/investor briefing on Wednesday morning. I don't expect I'll find out much more about the company than I already know, but you never know. Most of the City analysts and traditional media journalists will be very keen to hear about growth expectations for the full year, and beyond. In particular, we'll all be interested to hear whether they will keep the annual 20% growth in profits and earnings per share (EPS) target in tact.
Personally, I'd like to see them drop it, in favour of some cash flow based targets. Companies like WPP, Misys (LSE: MSY) and EMAP (LSE: EMA) are managed largely for cash profits. Companies which manage for earnings growth and are consistently seeing accounting profits less than cash profits will eventually get a large wake-up call from the stock market. That's part of the reason why Glaxo Wellcome's share price was whacked. You can run, but you can't hide.
Also of great interest to analysts and shareholders alike will be news of Rentokil's organic sales growth. In fiscal 1998, turnover grew by an anaemic 0.8%, although EPS grew by 18.4%. Even Rentokil's famed margin-stretching management couldn't carry this death-defying feat off for too much longer, and that led to the Annual General Meeting (AGM) statement which ruined the returns of this portfolio for 1999. Not that I'm bitter or anything (not half!).
Rentokil's interim EPS is expected to grow by about 13%. For most relatively mature companies, that would be considered pretty good going, especially in this low-inflationary environment. But for Rentokil, the former darlings of the stock market, this is seen as a huge disappointment. As for what Wednesday will bring, I'm reasonably sanguine. I'd like to see evidence of strong cash generation, and organic sales growth. Longer term, if earnings and cash growth rates of say 14-15% can be achieved, over an extended time period Rentokil Initial will be a successful investment. I'll be reporting on all the news in this space on Wednesday.
Our one US-quoted company, Dell Computer Corporation (NASDAQ: DELL) reports its first half and second quarter results tomorrow. That this is for the period ended 31st July I find quite extraordinary, and by that I mean in the best possible way. It takes Dell just 17 days (and fewer working days) to add up their numbers and present them to the market. The consensus EPS estimate is for 0.17 cents. In recent years (i.e. right up until just before the Qualiport bought shares in this excellent company -- another piece of great market timing!), Dell had a pleasant habit of soundly thrashing market estimates. In the past few reporting cycles, they've merely hit estimates, albeit they've still been growing very rapidly.
Against the equivalent quarter in 1998, Dell is looking at EPS growth of 41.67%. Of more importance to shareholders will be their top line sales growth, and signs of further pressure on their gross margins. With the prices of PCs falling seemingly by the day, it is no easy feat for Dell to maintain gross margins, although it should always be remembered that the component (or input) prices of PCs are also falling. Analysts are looking for quarterly sales to be just shy of US$6 billion, a 38.5% increase from the previous year. Gone are the days of quarterly growth of 50%, but in anyone's language, the numbers above, presuming they hit those targets, are impressive. Mind, they'd want to be, given that the shares trade on a forecast forward price to earnings ratio (P/E) of 57.
If you've never read the message boards, you're missing out on one of the best aspects of this site. They are updated constantly throughout the day, and are extremely interactive. For example, news of the recent share price fall of EMAP is posted here. A Foolish report of the Independent Insurance (LSE: IIG) analyst meeting is posted here and here. As for news of PizzaExpress' (LSE: PIZ) near 7% share price rise today, the message board is currently bare. Anyone help, not that current shareholders will be too worried? Maybe it was probably just a case of the shares being oversold (another Wise term -- sorry).
See you Wednesday, by which time Dell and Rentokil will have reported results. This is fun.
Company Change Bid DELL(US)+1.20 41.30 EMA -0.11 10.56 IIG -0.03 2.93 MSY +0.02 5.48 PIZ +0.48 7.55 RTO +0.04 2.47 ULVR +0.04 5.90 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.93 13.6% 19/12/97 783 Rentokil 2.55 2.47 (3.1%) 04/11/98 245 Pizza Exp 7.93 7.55 (4.7%) 22/04/99 347 Misys 5.76 5.48 (4.9%) 17/04/98 169 EMAP 11.34 10.56 (6.9%) 27/01/99 74 Dell (US) 44.63 41.30 (7.5%) 17/07/98 266 Unilever 7.53 5.90 (21.6%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2212.15 239.51 19/12/97 783 Rentokil 2046.53 1934.01 (112.52) 04/11/98 245 Pizza Exp 1966.34 1849.75 (116.59) 22/04/99 347 Misys 2028.71 1901.56 (127.15) 27/01/99 74 Dell (US) 2007.42 1852.24 (155.18) 17/04/98 169 EMAP 2341.32 2133.12 (208.20) 17/07/98 266 Unilever 2052.00 1569.40 (482.60) Cash: £3,433.46 Current Total : £16,885.69 Total Invested: £18,184.62 Profit/(Loss) : (£1,298.93) Value Per Share Day Month Year Qualiport 1.05% -0.51% -10.21% FTSE 100 -0.16% 0.06% 6.00% FTSE All Share -0.06% 0.17% 9.58%