Today I’m looking at two companies with very different businesses, but one thing in common — they both generate a lot of cash. Is either stock a buy, following today’s interim results?
A tasty dividend
Shares in casual dining chain The Restaurant Group (LSE: RTN) bounced 6% higher this morning after the group said it would close 33 underperforming restaurants.
The group — which owns the Frankie & Benny’s chain — said that unsuccessful menu changes, poor customer service and a lack of value offers had led to a 3.9% fall in like-for-like revenues during the first half of the year.
Action is being taken to address these problems and win back the loyalty of families, the group’s core customer base.
I bought shares in Restaurant Group earlier this year, because I was attracted to the firm’s strong cash generation and generous dividend yield. This morning’s results confirmed these attractions.
Adjusted earnings fell by 3% to 14.3p per share, suggesting that full-year forecasts of 28.7p remain realistic. Although operating profit fell by 4.4% to £37.5m, almost all of this was converted to free cash flow, which was £35.8m.
Using these figures, I estimate that Restaurant Group has an operating margin of about 10% and trades on a price/free cash flow ratio of 11.4.
These figures look attractive to me, alongside the stock’s forecast P/E of 15 and prospective yield of 3.7%. However, the group does face headwinds from rising costs, which could slow its recovery.
After today’s gains, I rate the shares as a hold.
Profits down, but still cashed up
Data centre and IT services group Computacenter (LSE: CCC) says that challenging conditions in the UK caused the group’s adjusted pre-tax profits to fall by 10% to £25.3m during the first half of the year.
However, trading in Germany and France was strong, and the group’s revenue rose by 2.6% to £1,478m over the period. Net cash rose by 115% to £96.6m and chief executive Mike Norris is confident that Computacenter “will finish the year with record levels of net funds.”
The second half of the year is also expected to yield a better performance on profit. Mr Norris expects Computacenter to deliver a “modest” improvement in adjusted pre-tax profit this year over 2015.
Buy and hold?
Computacenter is a company I rate as a potential long-term buy-and-hold stock. The group generates very high levels of free cash flow and has delivered steady earnings and dividend growth for a number of years.
Today’s results show that the firm has net cash worth about 78p per share. That’s more than 10% of Computacenter’s market value. The shares trade on 14 times forecast earnings for 2016, but if net cash is stripped out of this valuation then the business trades on a more modest 12.8 times forecast earnings.
Although Computacenter’s forecast dividend yield is only 3%, it’s backed by net cash and has risen by an average of 5% each year since 2010. For long-term shareholders, this has been a good income buy.
I expect Computacenter’s dividend and earnings growth to continue, and rate the shares as a buy at current levels.
