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One Top Small-Cap Share From The Motley Fool (Judges Scientific)

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A Top Small-Cap Share

Judges Scientific

Extracting value with a ‘buy and build’ strategy

Credit: Getty Images.


Dear fellow investor,

Rarely do you stumble across such a high-calibre example of a proven small-cap business with plenty of ongoing growth potential. Yet I believe that’s exactly what we could be looking at here with Judges Scientific (LSE: JDG).

Founded in 2002 by David Cicurel—a specialist in corporate turnarounds—Judges pursues a strategy of buying privately held companies which manufacture scientific instruments. There are, it transpires, over 2,000 of these in the UK.

It then helps these newly acquired companies to grow, by leveraging its own capital, guidance and expertise, all under an umbrella of robust financial controls. It calls this approach ‘buy and build’, and as of 30th June 2019, some 16 companies have been acquired.

Judges appears to have a good reputation as an acquirer, being both trusted to honour the pre-acquisition ‘Heads of Terms’ agreed and trusted to then move quickly with secured funding. It makes a point of treating vendors and staff with respect and avoids ‘micro-managing’ the companies that it acquires.

Judges prides itself on being extremely selective, with exacting requirements both in terms of the businesses that it acquires, and the prices that it might pay for them. In general, the companies must have established reputations in worldwide niche markets and be generating sustainable profits and cash.

Judges typically pays three to six times EBIT (earnings before interest and tax) for a company, mostly according to its size, and borrows up to 2.5 times EBITDA (earnings before interest, tax, depreciation, and amortisation) at a finance cost of 2–4%, depending on the group’s level of borrowing at the time. The approach then is to pay down the debt and reinvest profits in further acquisitions.

Investment thesis

Judges is not a complicated business, in my view. All its subsidiaries operate in broadly comparable markets and are of a broadly comparable size. And all the subsidiaries perform broadly comparable tasks: designing equipment, manufacturing it, and selling it.

Its financing seems conservative, there is an insistence on not over-paying for the businesses that are acquired, and Judges’ policy is to avoid doing anything that would damage its reputation as a successful acquirer and operator of the businesses that it selects.

Any such damage, it is aware, would harm its standing in the eyes of both shareholders and the banks on which it relies for finance when making these acquisitions.

Judges’ board is rightly proud of its record in growing the dividend, with the payout having grown by 17% per annum in recent years. For what is in effect a collection of small (but specialised) manufacturing companies competing on the global stage, that’s a pretty good achievement.

Ten years ago, Judges’ shares were changing hands for around 160p a pop; by the end of 2019, they’d risen to well over the 5,000p mark. And over the past five years, the share price has more than trebled—which has pushed the P/E ratio up to a heady 30.71 (based on the adjusted earnings per share) as I write this.

Given that the share price appreciation has been particularly steep since the late summer of 2019, investors could be forgiven for waiting to see if the price of this growth stock falls back a little, before taking the plunge. But Judges’ history suggests that this could be a strategy with an uncertain outcome, as there’s the potential risk of missing the boat.

Financials and valuation

Year ended 31st December 2015 2016 2017 2018
Sales (£m) 56.2 57.3 71.4 77.9
Pre-tax profits (£m) 8.8 6.6 10.4 14.3
Adjusted earnings per share (pence) 109 85 132 183
Dividend per share (pence) 25.0 27.5 32.0 40.0

Source: Judges Scientific.

As of 30 June 2019, Judges had net cash on the books of £7.4m. With revenue growing by 9% in the first half of this year to a record £40.2m and adjusted pre-tax profits up 27% to £8.4m, this should augur well for the full year. Judges’ last significant acquisition was back in 2017, so this recent growth is all organic.

Geographically, order intake was up across the board, apart from the UK, where economic weakness and Brexit uncertainty contributed to a drop-off in demand of 22%. Just such a wobble contributed to poorer results in 2016, so strong demand from elsewhere is definitely to be welcomed.

While Judges’ finances are fairly conservative, its accounts reveal adjusted operating profit to be its preferred way of reporting profitability to shareholders, although the more traditional non-adjusted pre-tax profit can easily be discerned from its figures.

I’ve shown adjusted pre-tax profit in the figures above and accept Judges’ argument that adjusting for the amortisation of acquired intangible assets provides a truer indication of underlying profitability.

Finally, is Judges cheap?

In one sense, definitely not: a price-earnings ratio of 30.71 is undeniably demanding, although higher ones are to be seen. But in another sense, the answer is ‘quite possibly’.

Judges is one of those shares that rarely seems cheap, and yet has motored ahead to provide shareholders with generous share price growth. Waiting for a more favourable price-earnings ratio might not be fruitful—even during the recession of 2008-2009, Judges’ share price proved more resilient than the broader market.

The bottom line is that Judges appears priced for further growth.

My positive view is currently shared by the expert investors who run The Motley Fool’s Hidden Winners service, where lead advisor Mark Rogers and his team have also rated Judges Scientific as a ‘Buy’ on two occasions to adventurous investors who are aiming to harness the incredible wealth-building potential of small-cap shares.

Risks and when I’d sell

The risks of an investment in Judges aren’t difficult to spot. Judges is a group of small specialist design, engineering, and manufacturing companies, selling on the global stage. Currency movements and the health of the broader global economy can obviously impact its fortunes.

Moreover, Judges’ strategy is to keep acquiring more such businesses — and however careful the company’s due diligence, there’s always a chance that a business might not turn out to fulfil Judges’ expectations. So, execution risk is very much present.

Helping to mitigate that risk are Judges’ veteran executives and non-executive directors. Much rests on their judgement and abilities and to my eye, David Cicurel, who turned 70 earlier this year, appears particularly crucial, acting as he does as the main point of initial contact for business owners wanting to sell.

Judges isn’t a large business, and succession planning right through the organisation is obviously important.

When would I sell? To date, Judges’ performance has been excellent. And I think that I’d be reasonably tolerant of a single acquisition underperforming, or even turning bad. Even at the upper reaches of the FTSE 100, acquisitions have a patchy record of success, and it is unrealistic to expect Judges not to slip up at some point.

My real worry is Mr Cicurel. Should he depart the business, or retire without retaining a presence on the board, I’d watch his successor like a hawk.

Looking for more investment ideas?

If you’re interested in small-cap investment recommendations like this one, and real-time updates and guidance sent directly to your inbox, make sure you check out our dedicated small-cap investing service — Motley Fool Hidden Winners.

As I briefly mentioned above, Mark Rogers and his team of investing experts at Hidden Winners have already twice recommended Judges Scientific shares to members. Keep in mind this is one of the service’s best performers, and is not intended to be representative. Not all of the recommendations have performed so well, and some have fallen in value.

But what you may not be aware of is that the Hidden Winners team have also published research on over 100 different UK small-cap shares — including a number of active “Buy” recommendations, plus a monthly “Best Buys Now” summary. They even highlight the small-cap shares they think you should try and avoid… simply click here to learn more now.

To your investing,

Malcolm Wheatley
Investment Writer,
Motley Fool UK.


Sources: The Judges Scientific investor website; Judges Scientific’s annual reports 2015–2018, and Judges Scientific’s interim results for the period ending 30 June 2019.

Disclosure: As of 20/12/2019, Malcolm had a beneficial interest in Judges Scientific. Mark Rogers owns Judges Scientific shares. The Motley Fool UK has recommended Judges Scientific shares.

This free special report was last updated on 20/12/2019. A previous version of this content was published as part our Motley Fool Shares 2020 report in November 2019.


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