Today, Clarkson Group (LSE: CKN) informed its investors that the company is on target to meet City growth forecasts for the full year, which is positive news. The global shipping services provider has had a rough time over the past five years as revenues have stagnated and the enterprise has had to spend heavily to drive growth.
Struggling to grow
Based on current City estimates, Clarkson is set to report a net profit of £31m for 2018, up around 100% since 2013. This looks impressive at first glance, but over the same period, the company’s return on capital employed — a measure of profitability for every £1 invested — has declined from nearly 16% in 2012 to just 9.1% on a trailing 12-month basis. That means the group is having to invest more to produce the same amount of profit. At the same time, the average number of shares in issue has increased dramatically.
There are around 59% more shares in issue today than there were in 2013, which explains why, as net profit has nearly doubled, earnings per share (EPS) have barely budged. The City is expecting the company to report EPS of 103p for 2018, compared to 97p in 2013.
These figures tell me that Clarkson is struggling to grow in the current environment, and with this being the case I don’t think it is worth paying the current multiple of 21.9 times forward earnings to buy the stock.
Instead, I believe global mining and commodity trading behemoth Glencore (LSE: GLEN) is a much better place for your money.
I would invest £1,000 in Glencore today because I’m so optimistic about the outlook for the shares. First of all, they are exceptionally cheap. At the time of writing, shares in Glencore are trading at a forward P/E of just 7.7. Then there’s the dividend yield to consider. Analysts believe the company will distribute a total of $0.21 per share in 2018, giving a dividend yield of 5.7% on the current share price.
There are some risks here. Last year, the group was hit by concerns about political uncertainty in the Democratic Republic of Congo, where it mines just over a quarter of the global output of cobalt. A new mining code that was signed into law in June sparked tensions between the company and the government. Investors have also taken fright after the US government announced it was investigating Glencore over bribery and corruption allegations.
It is impossible to quantify how these developments will affect the company over the long term at this point because information is limited. However, I am confident that over the next 12 months, as more information becomes available, investors should return as the cloud of uncertainty is lifted. In the meantime, they can look forward to a 5.7% dividend yield.
Continue to thrive
The problems above are confined to a relatively small part of the Glencore empire. The rest of the business should continue to thrive in 2019 as the company meets the world’s insatiable demand for essential commodities such as coal and copper.
Glencore is also the world’s largest commodities trader, which gives a substantial competitive advantage over almost every other mining enterprise in the world. That’s why, despite the company’s current problems, I would invest £1,000 in the share price today.
Rupert Hargreaves owns no share 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.