Qualiport

[ February 2, 2000 ]

Reviewing the Foolish Feedback

By Maynard Paton (TMFMayn)

Carburton Street, London -- A week or two ago I described an alternative investment strategy for the Qualiport. Using a set of arbitrary statistical criteria, I narrowed down the whole investment universe to just a handful of stocks. A dozen potentials subsequently caught my eye.

SSL International (LSE: SSL)
Johnston Press (LSE: JPR)
Ashtead (LSE: AHT)
Photobition (LSE: PHB)
Business Post (LSE: BPG)
PSD Group (LSE: PSD)
Southnews (LSE: SNW)
Triad (LSE: TRD)
Lavendon (LSE: LVD)
KBC Advanced Technologies (LSE: KBC)
City Technology Holdings (LSE: CIE)
Whitehead Mann (LSE: WHT)

In order to get the Qualiport research started, my first port of call was the Foolish community. I posted a "Foolish Help Needed" message on each of the appropriate company boards, trying to pick the brains of the respective Foolish shareholders.

My probing questions brought the very best out the Foolish respondents. Indeed, what was really emphasised in the replies was the incredibly high standard of knowledge and understanding that exists within the Foolish community.

But having now blown the Foolish trumpet, I have to reveal that there were disappointments. For instance, my enquiry on the All UK Shares message board. It concerned the three companies that had no individual message board -- Johnston Press, City Technology and Whitehead Mann. The post fell on deaf ears. Maybe my rather satirical message title -- "Wot no Penny Share tip?" -- didn't help.

So, with the help of the excellent feedback, a run through my initial thoughts so far.

Newspapers, Tiddlers and Oil

I wasn't unduly concerned about not having a reply on the All UK Shares board. Johnston Press, a local newspaper publisher, falls into the same boat as Southnews. My previous reservation about the future of local newspapers -- "the thought of Southnews possibly undergoing a defensive growth by acquisition strategy to fend off the Internet doesn't appeal for a long term investment" -- I guess applies to Johnston Press also.

There could be a Johnston Press versus Southnews head-to-head in the pipeline, but until I've totally convinced myself that local paper publishers can maintain their historic profitability, I'm going to defer. Don't get me wrong, Southnews and no doubt Johnston Press are great companies. If nothing better crops up, we can always come back.

City Technology and Whitehead Mann were the smallest of the twelve candidates. City Technology designs, develops and manufactures gas sensors and has recently warned on its profits. It may have a niche with its product, but a short and unspectacular financial record doesn't inspire. Whitehead is an executive recruitment consultant and does show steadily rising sales, margins and profits over the last five years. Is headhunting a growth market, or is it just riding the economic boom?

Moving onto the great Foolish replies: first, KBC Technologies. Peter Harper, in this insightful post, told me all I wanted to know.

KBC manufacture oil refinery equipment. The trouble is, when the price of oil goes down, so does the need for their product. Instead, the KBC customer can buy "sweet grade" oil, oil that has no requirement for any refinement. Peter also gave a worrying comment about KBC's competitors: "Personally, I would think this market is overcrowded already, with some large and deep-pocketed players".

All in all, a small company riding the ups and downs of the oil price, and having a lot of competition with fat wallets, just isn't Qualiport material.

Plant Hire

Ianshep posted a great reply on Ashtead, the plant and machinery hire business.

This comment caught my eye: "The main barrier to entry is the sheer capital cost of establishing the plant and premises. There is not much scope for 'virtual' competitors in this business because plant is big and heavy and you've got to put it somewhere! So a mould-shattering new entrant is unlikely and a new conventional competitor will take a long time to reach a large size."

But, the capital cost barrier is a double-edged sword, as Ianshep very wisely suggests: "As I understand it, Buffetteers wouldn't buy Ashtead because of the large capital expenditure which is inevitable in this business". I think he's right -- Ashtead has a rather restrained return on equity of 15% with gearing at 100%. Ashtead shareholders are currently awaiting the results of a review covering "strategic options to enhance shareholder value". I think we should leave them to it.

In a similar boat to Ashtead is Lavendon, a supplier of powered access machinery. Details of Lavendon were supplied by BobHellen in this superb post.

Bob mentions: "I have read that price is not the major criteria for customers who want availability and reliability... Management believe that operating margins will be maintained with higher volumes offsetting any lower pricing... The barriers to entry are mainly the capital costs."

Lavendon's operation and financial figures are similar to those of Ashtead. Although Lavendon is a focused business in a growing market, I can't really give them the nod while leaving Ashtead to one side.

PSD

There were two great PSD replies, from NigeW and mcginleym.

PSD is predominantly an IT personnel agency. I'm not convinced any IT agency has a durable advantage. Agencies basically perform a commodity service -- finding an employee for a specific employer vacancy. Low barriers to enter the industry is also a feature. Then there is the threat from IR35. In short, a government re-think on the current financial advantages of a contract employee could have a very unfavourable implications for PSD's business. With the shares standing on a current price to earning ratio (P/E) of 18, hardly doom and gloom stuff, I think we'll leave PSD.

Business Post

Two insightful posts from speaknoevil and CXM cover Business Post, the parcel delivery company.

Speaknoevil gives the positive outlook:"Entry barriers are high. Surely setting up a nationwide delivery infrastructure would take time, be logistically complex and expensive. A big slice of their business is IT hardware-related. As you've probably already read, I believe a lot of business was held back last year due to Y2K. This, I believe, is a temporary blip and normal business should resume."

CXM, on the other hand, gives the downside: "Margins will be under serious pressure... The parcel delivery market is already very crowded... It has the infrastructure but in its market segment the lowest price will win the customers... Others have equally good or better infrastructure."

I was sorely tempted by Business Post. It had a sound financial record until management shenanigans led to a profit hiccup. If, as speaknoevil suggests, Business Post are undergoing a temporary blip, then it could be a great recovery play. But my underlying thought is that Business Post is a small fish in a big pond. As CXM observes, I do tend to think parcel delivery is rather a commodity type of business. That could make a long term journey tough for Business Post shareholders. I think we'll stay away.

So, a quick summary. I'm going to put Southnews and Johnston Press to one side for further deliberation. SSL International, Triad and Photobition I still know very little about, but all look promising. Other suggestions from the Qualiport message board have been Waste Recycling (LSE: WRC), Diageo (LSE: DGE) and the new Glaxo Wellcome (LSE: GLXO) / SmithKline Beecham (LSE: SB.) entity. They too will go on the investigation list.

So, have I made a series of rash knee-jerk decisions? Let me know your thoughts on the Qualiport message board.

Related Links
• Southnews -- Qualiport Material
• An alternative selection strategy?