Jim Slater was truly a giant in the investing world. His book, The Zulu Principle, made growth investing available to anyone and helped reduce DIY investor’s reliance on analysts and their discounted cash flow models.
Ballooning valuation
Back in 2014, writing in The Telegraph, Jim Slater touted Restore plc (LSE: RST) as a buy. The company specialises in document storage, scanning and shredding, to help businesses move into the paperless, digital world.
Since the guru tipped it, the company’s valuation has ballooned from £133m to £416m. I’m going to apply Slater’s famous valuation techniques to this company to see if it’s still good value after today’s trading update.
The company’s priority has been to integrate the acquisitions Wincanton Records Management and PHS Data Solutions, which has seemingly gone off without a hitch. This has led to the expected synergies and trading in-line has been with expectations for the full year.
Analysts expect earnings to come in at 20.75p per share next year and 17.05p per share for this year just ended. Therefore, the company trades on a PE of 21.5 and is expected to grow earnings by 21.7%.
To check if a growth company was good value, Slater used the PEG ratio. He would divide the company’s PE by its earnings growth rate. A result under 1 implied significant value could be on offer. Restore’s PEG ratio is roughly 1, compared to 0.63 when Slater first picked it, indicating there may no longer be enough upside to the shares.
Let’s take a look at another Jim Slater pick.
Rather bullish
Slater mentioned Telford Homes (LSE: TEF) in the same article as Restore, although it’s not performed anywhere near as strongly. Back then, its market cap was £172m. Now, it’s £237m.
The property developer builds homes in central London, where there is a significant demand for extra housing. Telford has confirmed that Brexit has done little to dampen demand, yet still it trades on a PE of only 8 and will offer a yield of around 4.8% if the final dividend grows by as much as the interim.
However, analysts have predicted that Telford’s earnings will fall next year, largely due to a small correction in London property prices. This makes calculating a PEG ratio impossible. That said, I’m not sure Slater would dislike Telford because of just one bad year of growth. Indeed, his original thesis seemed rather bullish on London property.
I believe Slater’s assessment was likely correct. In the next six or so years, a populace nearly the size of Birmingham is expected to pour into London. That’s clearly going to increase housing needs, potentially supporting high prices and catering to Telford.
However, property prices are notoriously difficult to forecast. Interest rate rises would, for example, make debt more expensive, therefore likely resulting in a fall in house prices. Brexit too introduces yet more uncertainty into the equation.
