The recent share price performance of storage firm Big Yellow Group (LSE: BYG) shows just how profitable even some of the dullest businesses can be for investors. Before this morning, the stock was up 24% since the dark days of last October.
While some of this will be due to the general bounce in markets in 2019, I suspect investors continue to be enticed by the firm’s simple business model and fairly predictable earnings stream.
Today, the mid-cap announced a 7% increase in revenue in the year to the end of March (to a little over £125m) as a result of a rise in occupancy and rates at its 99 units.
This was regarded as positive by executive chairman Nicholas Vetch, especially as “activity levels on the final quarter were impacted by consumer uncertainty” with regard to Brexit. Adjusted pre-tax profit came in 10% higher at £67.5m.
Thanks to last year’s placing, Big Yellow has £65.3m to build new units. It acquired seven sites for development in London and the South East over the last year, bringing its pipeline to 12.
This is expected to provide “a steady increase in capacity over the next few years” and “make a significant contribution to future revenue growth,” according to the company. The firm continues to target an occupancy rate of 90% at its sites.
Dividends are also growing nicely. This morning’s 6% increase to the final dividend (16.5p) brought the total payout for the year to 33.2p, giving Big Yellow a trailing yield of 3.1% at the current share price.
You can get more elsewhere but the growth in demand for rental accommodation (particularly in the capital), coupled with the tendency of many to hoard rather than throw away, leads me to believe these cash returns are likely to continue growing.
Big Yellow’s stock trades on 25 times forecast earnings for its new financial year. That’s undeniably expensive and I’d much prefer to begin building a position on any general market weakness.
Notwithstanding this, I’d be far more likely to buy the FTSE 250 constituent over something like Purplebricks (LSE: PURP).
Like many of my Foolish colleagues, I’ve been bearish on the online estate agent for some time. Last July, for example, I remarked that the company’s desire to enter overseas was risky since the business model was still far from proven in the UK. Recent news from the company appears to have borne this out.
Earlier this month, it was announced that Purplebricks would be leaving the Australian market and that its presence in the US would be “materially scaled back” with a huge reduction in marketing spend.
Put simply, things haven’t gone as well as expected. Cue the departure of founder and CEO Michael Bruce and a further dive in the share price.
While some might see a bargain at this level (97p), I’d caution those tempted to invest to question whether they’re anchored to the company’s former value. The promotion of former vice-president of sales, Phil Felice, to interim CEO in the States, does little to suggest it will ever reach these heights again.
It may be a market leader, but the fact that people are expected to pay (albeit cheaper) fees to Purplebricks, regardless of whether their property sells, isn’t inviting in a subdued market.
And without clarity on our EU departure, I can’t see things changing anytime soon.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.