Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at BAE

Today I’m evaluating BAE Systems (LSE: BA)(NASDAQOTH: BAESY.US), a London-based global arms manufacturer, which currently trades at 448p. Here are my thoughts:

1. Financial strength: BAE is in fair financial health. The company has a net debt of over £1bn; ample interest cover of six times; and generates an average of more than £1bn in free cash flow yearly. However, it has a pension deficit of over £4.3bn.

2. Profitability: During the past decade, BAE enjoyed consistent growth right until the global financial crisis hit in 2009. Since then, it saw its revenue and profits decline in two of the last three years. Nevertheless, for the past ten years, the company doubled revenue and more than doubled earnings per share, and operating profit per share. Also, operating margin has been consistently around the high single digits, while return on equity has ranged around the high teens and has increased to the mid-20 to low-30 percent range over the last four years. 

3. Management: The company has a strong history of returning value to shareholders. Dividends per share have increased every year for the past 10 years, while the company has bought back a total of £1bn worth of shares from 2010 to 2011, and is planning to repurchase £1bn more over the next three years.

4. Long-term prospects: In the wake of the global financial crisis, governments around the world reduced defence spending — chiefly, the UK and the US, BAE’s largest customers, accounting for 62% of group revenue in 2012 — which has weighed down on BAE’s profits for the last few years.

To offset the effects of a budget-constrained environment, the company has pursued several strategies. It has moved from an equipment supply-centred model to growing more of its support-services business, which ensures a steadier income stream — as product demand wanes, more customers will look to upgrade and maintain existing equipment instead of purchasing new ones. As of 2012, support services accounted for 50% of group revenue.

Also, the company has been diversifying into higher growth areas such as cyber security and the electronics market, which has been seeing increasing demand lately, and which the company feels have significant growth potential.

Moreover, since 2009, the company has been driving down cost and improving efficiency, reducing its workforce and disposing several non-core segments.

Lastly, the company is looking to capitalise on the growth of international markets, which accounted for 30% of group revenue in 2012. BAE is already the leading defence supplier in Saudi Arabia and Australia, and is developing India into another home market, while also pursuing several opportunities in Malaysia, Oman, United Arab Emirates, and other Gulf states.  

5. Valuation: BAE shares are trading at a forward price-to-earnings (P/E) ratio of 10, slightly below its 10-year median P/E of 11, and a discount to the sector P/E average of 15.

My verdict on BAE

Due to shrinking defence budgets, BAE has struggled to generate revenue growth for the past few years, and it looks like this fiscal environment will continue for the next few years, with more possible cuts in the future. Also, its huge pension deficit is a concern.

However, with its long history of growing revenue and profits, outstanding cash generation, strong positions in its end markets, and being the only major player in the UK, I think BAE will be able to hurdle these difficult times and return to growth. Furthermore, it is trading at attractive valuations –an earnings yield of 10% and a solid dividend yield of 5%, twice covered.

So overall, I believe BAE at 448p looks like a buy.

More FTSE opportunities

As well as BAE, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post BAE Systems Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

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Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at British Sky Broadcasting Group

Today I’m evaluating British Sky Broadcasting Group (LSE: BSY), a British multichannel, multiplatform pay television services provider, which currently trades at 827p. Here are my thoughts:

1. Financial strength: The company is in excellent financial health. Net debt is only £1.1bn and comfortably covered by cash flow from operations of £1.8bn; interest cover is a hefty 17 times; and the company has generated more than £800m in free cash flow for the past 4 years.

2. Profitability: BSkyB has been one of most successful companies in the FTSE 100 for the past 10 years. Revenue per share and operating profit per share has doubled, while adjusted earnings per share and dividend per share has increased threefold and fivefold, respectively.

Recently, the company posted record results for the 12 months ending 30 June 2013. Revenue was up 7% to £7.2bn, operating profit increased by 9% to £1.3bn, and basic earnings per share grew 18% to 60p. In addition, the company added 3.3 million new subscriptions, for a total of 32 million.

3. Management: Jeremy Darroch has been BSkyB’s CEO since taking over from James Murdoch in Dec 2007. Prior to that, he was the company’s CFO from 2004 to 2007. He has successfully transformed BSkyB from a pay-TV provider to a triple-pay provider of television, telephony and broadband services and, under his helm, the company achieved its target of reaching 10 million subscribers.

4. Long-term prospects: BSkyB has dominated the UK pay-TV market for years offering the best content such as major sports events like rugby, football and cricket; and movies and television shows featuring Hollywood blockbusters and premium US drama along with original British productions.

It is the UK’s largest pay television service provider with over 10 million subscribers and has rapidly grown its paid-for-subscription products from 14 million in 2008 to 32 million today. Also, it has broadened its product offerings with mobile TV and video online demand and is the UK’s fastest growing broadband and telephone service provider with already around 4.9 million customers.

However, the company faces heavy competition in the coming years. Just recently, BT Group had acquired a share of the rights to Premier League football television coverage, which include the rights to 38 live games. Also, it struck a deal with Virgin Media allowing Virgin Media cable customers free access to BT’s sport offerings. Furthermore, over the top (OTT) video providers such as Google TV, Apple TV, Netflix and Amazon‘s Lovefilm could potentially take away market share.

5. Valuation: Shares are trading at a forward price-to-earnings (P/E) ratio of 14, moderately below its 10-year median P/E of 18. It also returns a prospective dividend yield of 3.6%, covered 2 times.

My verdict on British Sky Broadcasting Group

For the past decade, BSkyB was able to dominate the UK television space virtually uncontested. However, with increasing competition, this will be more difficult to do than in previous years. For one, the cost of acquiring the rights to premium content could increase –which already has happened as BSkyB had to pay 40% more for its latest Premier League deal. Also, the company will have to spend more to fend off competition, which could squeeze margins. More importantly, the company could lose its lock on some of its major offerings, which has been the source of its competitive advantage.

Nevertheless, I think it will be very hard to dislodge BSkyB from its perch atop pay-TV. It still offers the best content and its new services have rapidly grown, which could provide it with future growth opportunities. Moreover, the company is trading at a discount relative to both its historical P/E and to the wider market.

 So overall, I believe British Sky Broadcasting Group at 827p looks like a buy.

More FTSE opportunities

As well as British Sky Broadcasting Group, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post British Sky Broadcasting Group Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

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Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Tesco

Today I’m evaluating Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US)], a British multinational retailer, which currently trades at 363p. Here are my thoughts:

1. Financial strength: Tesco is in solid financial position.  Net debt/operating cash flow is less than 2 times; net gearing is 50%; interest cover is an adequate 7.5 times; and free cash flow has averaged nearly £2bn per year over the last 3 years.

2. Profitability: Tesco has delivered outstanding growth for nearly two decades. However, with the continuing weakness in Europe and facing stiff competition at home, the company has struggled of late. In the last fiscal year, underlying profit before tax declined by 15% while underlying earnings per share fell by 14%. Forced to compete in price, the company’s margins have contracted from to 3.4% from 5.6% the previous year.

Also, international trading profit declined by 22%, due to the impact of regulatory changes in South Korea and impairment of businesses in Turkey, Poland and the Czech Republic.

3. Management: I believe the company’s new direction under Philip Clarke, which focuses on developing its “multichannel” footprint, strengthening its core UK business, and adopting a more prudent international growth strategy,  places the company in a better position moving forward.    

4. Long-term prospects: Tesco has fallen out of favour with investors recently after a rough 18 months where it was rocked by the horsemeat scandal, several quarters of declining market share and like-for-like sales, and write-offs of its Fresh and Easy US business and several UK properties of more than £1bn  and £804m, respectively.

However, despite the grim outlook, I believe Tesco’s competitive position remains solid. It is still the largest UK grocer with a market share of 30% –almost doubling that of its closest rival Wal-Mart’s ASDA. It also owns the UK’s widest store network with around 3,000 stores and the world’s largest and most profitable online supermarket, which reached a record-high revenue of over £3bn last year. In addition, it is the number one or two retailer for general merchandise in 8 out of 9 of its international markets.

Furthermore, to adapt to the rapidly changing retail environment, the company has announced new strategic objectives which include: a shift from traditional large-store formats to building its “multichannel” retail capabilities such as convenience and online retailing; focusing on its core UK operations to maintain its leading position — the company has invested around £1bn to overhaul its superstores; and adopting a more disciplined approach to international expansion, concentrating only on markets that could deliver strong investment returns. 

5. Valuation: With a market cap of £30bn, Tesco trades at a forward price-to-earnings (P/E) ratio of 11 -slightly below its 10-year median P/E of 13 and the industry average of 12– and a prospective dividend yield of 4%, twice covered.

My verdict on Tesco

Although recent results have been disappointing and with competition in the UK likely to remain competitive, I think the company still owns a distinct advantage with its scale and size. Also, its profitable international business –29% of the company’s profits come from outside the UK–  and established online presence could be a source of future growth opportunities.

Moreover, the company intends to tighten capital spending during the next few years –around 3.5% to 4% of revenue– which will add to its already strong cash flow. What’s more, shares are trading at an undemanding P/E of 12, a discount compared to its peers Wal-Mart and Carreouflour.        

So overall, I believe Tesco at 363p looks like a buy.

More FTSE opportunities

As well as Tesco, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012..

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article. The Motley Fool owns shares in Tesco.

The post Tesco Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

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Right now I am trawling through the FTSE 100and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Rolls-Royce Holdings

Today I’m evaluating Rolls-Royce Holdings (LSE: RR)(NASDAQOTH: RYCEY.US)], a British multinational company that provides integrated power solutions such as gas turbine engines, fuel cells and gas compression, which currently trades at 1,197p. Here are my thoughts:

1. Financial strength: The company is in solid financial health with net cash of £1.3bn, interest cover of 40 times, and robust free cash flow averaging around £500m over the past 5 years.

2. Profitability: During the past ten years, the company has doubled its revenue, tripled its order book and increased adjusted earnings per share more than fivefold; operating margin has consistently been around the high-single digit to low double-digits; and return on capital employed has been very good, averaging 16% per year.

Also, recently, the company released solid half-year results:

• order book increased to £69bn from £60bn at the end of 2012;
• underlying revenue was up 27% from the previous year to £7.3bn;
• and pre-tax profit increased by 34% from the previous year to £840m.

3. Management: John Rishton, the company’s current chief executive, has a tough act to follow. He replaced one of the most highly regarded chief executives in Sir John Rose, who retired on March 2011 and was Rolls-Royce’s CEO since 1996. During his tenure, the company’s order book grew from 7.6bn in 1995 to around £60bn in 2010; revenue from £3.6bn in 1995 to £11bn in 2010; and profit from £175m in 1995 to £540m in 2010.

4. Long-term prospects: Rolls-Royce Holdings operates in four major business segments: civil aerospace, defense aerospace, marine and energy. The company makes money not only from selling its engines but also a huge part of revenue — 52% in 2012 — is generated from repair, upgrade and maintenance services, which the company packages with its products. Thus, as the company’s installed base of products grows so does its service network.   

The company is a major manufacturer of aero engines for commercial aircrafts, powering more than 30 types of commercial aircraft and 12,500 engines in service with customers around the world. It is the market leader in the modern, wide body and the corporate market segments. Also, the company is the second largest provider of defence aero-engine products with 18,000 engines in the service of 160 customers in 103 countries and is the market leader in military transport/patrol market with over 8,000 engines in service.

However, the company also faces a number of headwinds: defence spending in developed markets have remained flat for the past few years; while European economies remain weak and the US recovery still looks shaky; and also, growth in emerging economies Asia and Latin America have been subdued.

Nonetheless, Rolls-Royce’s future looks very promising, according to the company — global market demand for its products is set to grow to around US$3 trillion over the next 20 years.

5. Valuation: Rolls-Royce shares are currently trading at a premium to its 10-year price-to-earnings (P/E) ratio average of 14.5 with a forward P/E of 19. It also returns a prospective dividend yield of 1.85%, three times covered.

My verdict on Rolls-Royce Holdings

Rolls-Royce is a good company. It is the market leader in several of its end markets; it has a healthy balance sheet; a good track record of growing revenue, earnings and dividends; and earns very good returns on capital. Also, the long-term outlook for the industry looks very rosy. However, Rolls-Royce shares are already trading at a forward P/E of 19, and look fully priced at best. Unless the company has a really strong competitive advantage, I remain sceptical about future growth and would only buy at a discount, especially considering that defence spending and global growth remains subdued. Therefore, I am only prepared to buy Rolls-Royce shares at a lower price; I can find better value elsewhere.       

So overall, I believe Rolls-Royce at 1197p looks like a hold.

More FTSE opportunities

Although I feel Rolls-Royce is a hold right now, I am more positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post Rolls-Royce Holdings PLC: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

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Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Reckitt Benckiser

Today I’m evaluating Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US), a British multinational consumer goods company that manufactures household cleaning, and health and personal care products,which currently trades at 4,670p. Here are my thoughts:

1. Financial strength: Reckitt Benckiser is in solid financial health. Net debt/EBITDA ratio is less than 1 and interest cover is a hefty 171 times. Also, during the past 10 years, the company has converted an average of 18% of its revenue into free cash flow (FCF) and delivered over £1bn in FCF per year.

2. Profitability: Reckitt Benckiser has been one of the best-performing companies in the FTSE 100 index over the past decade. The company has grown revenue per share more than 2.5 times, operating profit per share and adjusted earnings per share more than 3.5 times, and dividend per share almost 5 times. Operating margin has consistently averaged an industry leading 23% and return on equity (ROE) has been stellar, averaging 35% per year.

3. Management: Bart Becht was the company’s CEO from 1999 to 2011. Under his tenure, the company achieved great success with its focus on marketing its core brands and excellent product innovation, value-enhancing acquisitions, and improved supply chain efficiency. His replacement, Rakesh Kapoor, has been with the company since 1987 serving various roles.     

4. Long-term prospects: Reckitt Benckiser is the world leading maker of household cleaning products and also owns a strong portfolio of brands in health and personal care. Its core products — which the company refers to as ‘Powerbrands’ — include household names like Durex, Strepsils, Dettol, Woolite and Clearasil.

Recently, the company laid out plans on focusing more on high growth and high margin product categories and regions. These include concentrating its efforts and capital spending on its health and hygiene business and into developing markets. The company is targeting to grow the proportion of revenue derived from health and hygiene products and faster growing regions to 50% and 72% of group revenue by 2015, respectively. At the end of 2012 they represented 44% and 68% of group revenue.   

Also, late last year, the company acquired Schiff Nutrition, a leading provider of vitamins and supplements in the US. The company sees this as a platform to launch its entry into the large and growing global vitamins and supplements market.

Furthermore, the company’s pharmaceutical business continues to be highly profitable increasing its net revenue by 10% and operating profit by 3% in 2012 despite its high-selling Suboxone tablets losing patent protection in 2010. Since then, the company has successfully transitioned to Suboxone‘s film version which is patent protected until 2020.

However, the future profitability of its pharmaceutical business still remains a concern with the lingering threat of generic competition, government regulation, and healthcare reform.  

5. Valuation: Reckitt Benckiser shares are trading at a forward P/E of 17, slightly lower than its 10-year P/E average of 18, and at 30 times its 10-year average earnings. Also, it returns a dividend yield of 3%, twice covered.

My verdict on Reckitt Benckiser

If you were fortunate enough to hold on to Reckitt Benckiser shares for over a decade –you would have been rewarded with annualised returns of 17% per year. Reckitt Benckiser is one of those Buffet-type shares –companies that are well-run, have strong brands, earn great returns on capital and generate robust free cash flows. However, the problem with these kinds of companies is that they rarely trade at a discount which lowers your margin of safety.

On the other hand, you could also say Reckitt Benckiser shares were trading at the same heady valuations 10 years ago. So, it would not be unreasonable to assume that it can deliver returns close to what it achieved last decade; its fundamentals remain intact and its future looks promising.

Still, even though it is a ‘wonderful’ company, I do not think it has a wide enough economic moat that would make me comfortable buying it at these prices. Plus, there are other similar companies you could get for a lower price.           

So overall, I believe Reckitt Benckiser at 4,670p looks like a hold.

More FTSE opportunities

Although I feel Reckitt Benckisale is a hold right now, I am more positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post Reckitt Benckiser Group Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

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Right now I am trawling through the FTSE 100 (UKX) and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at WPP

Today I’m evaluating WPP (LSE: WPP) (NASDAQ: WPPGY.US), a British multinational advertising and public relations company, which currently trades at 1209p. Here are my thoughts:

1. Financial strength: WPP is in solid financial position with a net debt/EBITDA ratio of 1.7; gearing of 40%; and interest cover a sufficient 6 times. Also, the company’s long-term debt is rated Baa2 — medium grade and subject to moderate credit risk — by Moody’s.   

2. Profitability: WPP has performed well this past decade growing revenue per share, operating profit per share, adjusted-earnings per share and dividend per share by compound annual growth rates (CAGR) of 9%, 11%, 10%, and 17% respectively. Operating profit margin has been consistently around 12%; while return on invested capital (ROIC) –a measure of how well a company uses it money- has been adequate around 9% per year.

3. Management: Martin Sorrell is the company’s founder and has been its chief executive since 1986. He is largely credited for building WPP into the largest advertising and marketing services group in the world today.   

4. Long-term prospects: WPP is the world’s largest advertising company by revenues, and employs 162,000 people in over 100 countries. It owns around 150 advertising, market research, and public relations companies such as Oglivy, Burson-Marsteller and Hill & Knowlton. It services the biggest corporations in the world including 350 out of 500 of the Fortune 500 companies, all 30 companies in the Dow Jones 30, and 63 out of 100 of the Nasdaq 100.

The company’s strength lies in the vast array of companies it owns. With hundreds of companies at its disposal, WPP can offer clients a wide range of services specific to their needs. Three to four different companies can work for a single client, providing clients with a truly integrated communications service.

WPP is coming off — according to the company — a second straight “record” year where in the company reached new highs in revenue, earnings, margins and profitability. Revenue reached over £10bn and was higher than any of the company’s competitors for a fifth straight year; operating profit grew over 7%; and operating margin reached a new high of 14.8%; while dividends increased by 16% to a record level 28.5p.

Also, WPP now derives 30% of its revenue from high-growth regions Latin America, Africa & the Middle East and Asia-Pacific. Revenues from these regions have grown by 13% and 9% in the last two years respectively The company’s objective is to increase the proportion of revenue from emerging markets to around 35%-40% of group revenue in the next two to three years.

5. Valuation: WPP shares are trading at a forward price-to-earnings (P/E) ratio of 15, slightly higher than its 10-year P/E average of 13; while its P/E based on the company’s 10-year average earnings already stands around 20.  

My verdict on WPP

WPP is quite an enticing company. It possesses a narrow competitive advantage over its peers; it has a very good track record of growing revenues, earnings and dividends, while also earning solid returns on invested capital, and has a good growth profile. However, the question is it cheap enough to buy? WPP shares have already increased by more than 30% in one year and it is already a bit on the pricey side.

Nonetheless, I think WPP still offers good value. It has grown adjusted-earnings per share by 14% per year in the last three years; I think it would likely be able to sustain a high level of growth in the next few years with its strong presence in emerging markets. Moreover, it returns a dividend yield of 2.6%, covered 2.5 times, implying further scope to grow. Therefore, I think one can reasonably expect returns of at least 10% per year holding WPP shares for the long-term, especially if the macro-economic environment continues to improve.

 So overall, I believe WPP at 1,209p looks like a buy.

More FTSE opportunities

As well as WPP, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post WPP Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

More reading

• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!
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Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at Shire

Today I’m evaluating Shire (LSE: SHP), a specialty biopharmaceutical company focusing on rare diseases, which currently trades at 2246p. Here are my thoughts:

1. Financial strength: Shire is in excellent financial health, with a net cash position of £254m and interest cover a hefty 28 times. Also, the company is a cash machine generating around £400m in free cash flow per year during the last 5 years and with a 10-year average free cash flow margin of 20%.

2. Profitability: During the past 10 years, Shire has grown revenue per share and operating profit per share quite consistently by 15% and 18% per year respectively; while adjusted-earnings per share growth has been very variable ranging from around 10% to 140% and a number of years with negative growth. Operating margin has averaged a healthy 19% per year, ranging from the low-teens to mid-twenty percent range and has been expanding the last few of years; while return on invested capital (ROIC) has been stellar at 19% per year over the last 5 years.

3. Management: Angus Russell, the company’s CEO since 2008, has retired after 13 years with the company and has been replaced by Flemming Ornskov, who took the helm on April 30, 2013. Ornskow seems to be a capable replacement — he was the former chief marketing officer at Bayer, a practising physician and has extensive pharmaceutical experience with stints in Novartis, Merck and Bausch & Lomb.

4. Long-term prospects: During the past 18 years, Shire has built itself into a truly global pharmaceutical company through key acquisitions and innovative product development focusing on specialty treatments for rare diseases. The company operates in three main business segments: Specialty Pharmaceuticals, Human Genetic Therapies ((HGT) and Regenerative Medicine. The company’s best selling products include attention-deficit-hyperactivity disorder (ADHD) treatments, where in Shire has 27% share of the US market valued around $8bn and which has delivered more than £1.5bn in revenue in 2012, and HGT medications, which delivered £1.2bn in revenue also in 2012.    

However, sales of the company’s top product Adderall XR — which accounted for 50% of product sales in 2008 — has been dwindling ever since it lost patent protection in 2009. But the company has regained its footing since then. The US ADHD market has grown by an average of 21% per year over the last 3 years — according to IMS, a leading global provider of business intelligence for the pharmaceutical and healthcare market. Also, the company’s other products — Intuniv, an adjunct ADHD treatment for children and adolescents, and HGT treatments Replagal, the market leading treatment for Fabry disease and Vpriv — have shown excellent growth the past few years.

Furthermore, the company has recently gained marketing approval for Elvanse — Shire’s blockbuster ADHD treatment and marketed as Vyvanse in the US — in several countries in Europe earlier this year. This is the first stimulant pro-drug treatment to be launched in Europe for the treatment of ADHD.

On the other hand, the company faces some headwinds in the coming years. Some of the company’s top products will soon deal with generic competition; while performance of the company’s recent acquisitions have been weak.

5. Valuation: The shares look underrated with a price-to-earnings-growth (PEG) ratio of 0.56, a prospective (P/E) of 14, which is below its 10-year P/E average of 16; Also, its trailing price-to-free cash flow ratio (P/FCF) of 16 is well below its 10-year P/FCF average of 24.

My verdict on Shire

Shire has done well with its strategy of focusing on treatments for rare diseases and catering to needs of specialty physicians. It has built a strong portfolio of specialty products and continues to invest in its pipeline. Also, with its huge cash pile, it can continue making acquisitions to boost further growth. Therefore, I think the company can grow around at least high single-digit to double-digit rates for the next few years. Furthermore, its shares looks cheap compared to its historical valuations.

So overall, I believe Shire at 2246p looks like a buy.

More FTSE opportunities

As well as Shire, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012.

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post Shire Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

More reading

• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!
• Here’s how Aviva shares could soon rise a further 20%… or fall 15%!
• £5,000 invested in high-yield FTSE 250 stock Domino’s Pizza on 7 April is now worth…
• Tesla stock’s up 50% in a year. Could it go even higher?
• Up 9% today, is this FTSE 250 share’s recovery gaining pace?

Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.

I hope to pinpoint the very best buying opportunities in today’s uncertain market, as well as highlight those shares I feel you should hold… and those I fell you should sell!

I’m assessing every share on five different measures. Here’s what I’m looking for in each company:

1. Financial strength: low levels of debt and other liabilities;

2. Profitability: consistent earnings and high profit margins; 

3. Management: competent executives creating shareholder value;

4. Long-term prospects: a solid competitive position and respectable growth prospects, and;

5. Valuation: an under-rated share price.

A look at G4S

Today I’m evaluating G4S (LSE: GFS), a British multinational security services company, which currently trades at 229p. Here are my thoughts:

1. Financial strength: The company has adequate financial strength with net debt of 3.5 times EBITDA and interest cover an ample 5 times. However, net debt has been trending higher from £500m in 2008 to £1.8bn in 2012.

2. Profitability: The company has performed very well in the last eight years with revenue per share compounding by 6% per year, operating profit per share by 21% per year, and adjusted-earnings per share by 10% per year. Operating margin has been consistently around 6% to 7% and return on equity (ROE) has been very good around 15%-20% per year and has been steadily increasing.

3. Management:  Under Nick Buckles’ leadership, the company has expanded into 125 countries and its value has grown more than 2.5 times from a market capitalisation of £1.2bn in 2004 to £3.3bn today. Also, dividends per share have consistently grown for eight straight years compounding at an annual rate of 22%. However, under pressure after a rough 2012, where the company bungled security staffing at the Olympics and after the botched acquisition of the catering and cleaning business, ISS, Nick Buckles resigned as CEO at the end of May. Ashley Almanza, the CFO, who joined the company in March, has taken over as chief executive since June.

4. Long-term prospects: G4S makes money by providing a variety of security services from electronic monitoring such as CCTVs to manned security in ports, airports, oil and gas facilities to security services for government departments such as police, health, and border control to the management of transportation of cash for retailers and financial institutions.    

The company has a diversified revenue base and is not dependent on a single customer which has enabled it to withstand the weak marcoeconomic environment of the last few years. Despite sluggish European revenue growth of 3.5% per year during the past five years, this has been more than offset by strong revenue growth in North America and developing markets of 11% and 14% per year respectively.    

Also, the company derives its revenue mainly from recurring sources by fostering long-term partnerships with customers through long-term contracts, some of which run up to 25 years in length, and also short-term contracts with repeat customers. The company boasts of a 90% customer retention rate which enables it to lock up customers for many years regardless of the contract length.

Furthermore, G4S is poised to continue growing in next few years. The global security market is expected to generate £96bn in revenue per year and set to grow by 7% per year until 2021, while 23% of the company’s revenue comes from developing markets -its fastest growing region. 50% of the global security market’s revenues are expected to come from these fast growing regions by 2016.

5. Valuation: Shares are trading near its 52-week low and at a prospective price-to-earnings (P/E) ratio of 11, below its 10-year average P/E of 13. It also returns an above-average prospective dividend yield of 4%, twice covered.

My verdict on G4S

Since being founded in 2004 from the merger of Securicor Plc and Group 4 Falck, G4S has been consistently profitable, with stable margins, very good cash flow generation, and excellent dividend growth. Also, the company has a strong global exposure and has a lot more room to grow: The security industry is expected to grow at healthy rates in the next couple of years, and with G4S possessing a solid competitive advantage with its large scale and long-term partnerships with customers, it has a strong chance on improving its 8% market share in a highly fragmented industry. Moreover, the shares look very attractive at an earnings yield — the reciprocal of the P/E and is basically the ‘interest rate’ of a share assuming no growth in the future — of 9% and a dividend yield of 4%, which gives you a return of at least 13% per year.

So, overall, I believe G4S at 229p looks like a buy.

More FTSE opportunities

As well as G4S, I am also positive on the FTSE shares highlighted in “8 Dividend Plays Held By Britain’s Super Investor“. This exclusive report reveals the favourite income stocks owned by Neil Woodford — the the City legend whose High Income fund turned £10,000 into £193,000 during the 25 years to 2012..

The report, which explains the full investing logic behind Mr Woodford’s dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

> Zarr does not own any share mentioned in this article.

The post G4S Plc: Buy, Sell Or Hold? appeared first on The Motley Fool UK.

More reading

• Down 45% in 5 years, this UK stock now offers a stunning 11% dividend yield!
• Here’s how Aviva shares could soon rise a further 20%… or fall 15%!
• £5,000 invested in high-yield FTSE 250 stock Domino’s Pizza on 7 April is now worth…
• Tesla stock’s up 50% in a year. Could it go even higher?
• Up 9% today, is this FTSE 250 share’s recovery gaining pace?