Why I’d Buy Globo Plc, Hold Royal Dutch Shell Plc & Sell Pressure Technologies Plc

Globo (LSE: GBO), Pressure Technologies (LSE: PRES), Shell (LSE: RDSB) — should you bother with any of them if you are on the hunt for value? 

On the right path 

Globo, a technology firm listed on the AIM, has caught my attention in recent months, having recorded a 48% gain in share price since early January. Globo focuses on the mobile software and services market, which is hot property right now. 

Its first-quarter results, which were released yesterday, confirm the view that the company is on the right path, with rising revenues, earnings and cash flows. It is also winning very important contracts, while it continues to expand in the US. 

The key question for value hunters — the stock trades at a lowly 7x p/e multiple — is whether Globo will generate more cash over time. In the first quarter, free cash flow stood at €1.8m, while its net cash position increased to €41.2m (31 December 2014: €40.4m).

Free cash flow is calculated “by taking the net cash flow from operating and investing activities, adding back the cost of acquisitions,” according to Globo, which means that its core, undisturbed free cash flow is higher than its reported free cash flow. In Q1, free cash flow improved year on year, but Globo must also continue to pay attention to its working capital management (WCM) in order to attract a valuation premium. 

WCM is a key element to watch in future. 

Pressure drop

Today’s trading update from Pressure Technologies was very bad on all counts. In the wake of a profit warning, the shares had lost almost 30% at the time of writing, and it doesn’t look like the pressure is going to ease anytime soon.  

Falling oil prices, of course, are to blame for weakness in its precision machined components and engineered products units.

The company sees “material deterioration in the immediate prospects” of both units. 

Furthermore, it noted that weak market conditions are “now expected to continue into the next financial year, when they will also impact the results of the cylinder division”, adding that the planned restructuring of the alternative energy unit has now been completed, but “the division has experienced delays in securing new orders which will impact its performance in the current year.”

I wouldn’t touch it, to be honest. 

Big challenges

However, I continue to be bullish on Shell, in spite of its recent weakness on the stock exchange. Sure, it has lost about 10% of value since it said it would acquire BG, but BG could render Shell a stronger entity, one with a more solid earnings and dividend profile.

Of course, Shell management is faced with big challenges (BP would be a safer option), but the combined company that will emerge from the integration of BG should be able to cope with major rivals, while strengthening its strategic position in a sector whose dynamics are changing beyond recognition (see OPEC policies, regulatory environment, and so forth).  

Aside from the BG merger, and the high price that Shell decided to pay, recent news also contributed to weakness in its shares — “Royal Dutch Shell said Wednesday it was discussing the repayment of an outstanding debt of over $2 billion with Iran when international sanctions are lifted,” The Wall Street Journal reported this week, for instance. 

Based on trading multiples and other factors, however, Shell remains a strong, albeit risky, buy at present. 

That said, if you are not convinced that Shell is the right investment for you, you'd do well to look elsewhere for value, maybe choosing a British designer and manufacturer that size-wise sits between Globo and Pressure Technologies.

This is a bet on the luxury sector: its stock trades at a discount to fair value, and doesn't look pricey at all compared to the sector's valuation! Its name just caught my interest, and is disclosed in this value report (see table 3, it is one of our top 5 picks!), which also includes many other growth stocks with outstanding track records. 

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.