A new look

Five years ago, Tesco was bloated, laden with debt, and hated by many of its suppliers. Chief executive Dave Lewis has changed all of this. He’s cut £1.3bn of costs, improved the firm’s business practices, and ditched some of its overseas operations.

To help fuel long-term growth he’s acquired fast-growing wholesaler Booker and set up a partnership with French supermarket group Carrefour. Debt levels have tumbled and the group’s profit margins and cash generation have improved sharply.

Lewis says that the firm has now met most of its turnaround goals. He’s “very confident that we will complete the journey in 2019/20.”

Two new opportunities

My colleague Kevin Godbold believes Tesco’s growth may slow as its turnaround completes. I’m not so sure. Last week’s results suggested to me there are at least two routes open to boost profits and shareholder returns.

A recent report in The Sunday Times suggested the company is working on a loyalty scheme similar to Amazon Prime. Tesco hasn’t denied this. The suggestion is that the firm’s Clubcard offering could be expanded to tempt shoppers to sign up to the group’s banking and mobile phone services. I think this could be big.

The second opportunity is for the firm to increase shareholder returns. Tesco’s strong cash generation and low debt levels suggest to me it may soon be able to return spare cash to shareholders through share buybacks or special dividends.

In my view, the outlook remains positive. Trading on 14.5 times 2020 forecast earnings with a 3% dividend yield, I view Tesco stock as fairly priced. I remain a long-term buyer.

Dull but profitable?

Like Tesco, small-cap Carr’s Group (LSE: CARR) operates a fairly dull business in a mature sector of the market. This £140m group has two divisions, agricultural supplies and engineering, with a focus on remote handling equipment for the energy industry.

Carr’s doesn’t attract much attention, but the firm’s shares have risen by more than 300% over the last 10 years. By contrast, Tesco stock is still worth 25% less than it was 10 years ago.

I see Carr’s as a stock you could safely buy and forget for another decade. The firm’s half-year results, published today, confirm that view. Adjusted pre-tax profit rose by 4.5% to £11.4m during the six months to 2 March and the interim dividend will rise by 4.7% to 1.125p per share.

Although demand for agricultural feed was lower than usual due to the warm winter, the group’s engineering division turned in a strong performance with “significant improvement in UK manufacturing” and a “major USA $8.5m contract win” for a remote handling customer.

Carr’s shares have dipped slightly today and currently trade on 10.5 times forecast earnings, with a 3.2% dividend yield. The group has stable profits and a strong balance sheet. I see this as the kind of ‘boring’ stock that could help you retire early.

The post Tesco share price: can it keep rising? appeared first on The Twelfth Magpie.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head owns shares of Carr's Group and Tesco. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Tesco. 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.

One approach is to look for so-called defensive companies. These are businesses that provide goods or services that are part of the fabric of everyday life. Demand doesn’t change much during a recession and customers are often very loyal.

Today I’m going to look at two companies which match this description, starting with FTSE 100 consumer goods giant Reckitt Benckiser Group (LSE: RB).

Focus on health and hygiene

Brands such as Dettol, Durex, Gaviscon and Nurofen give us a clue about Reckitt Benckiser’s strategy. Now known as RB, the firm’s focus is on health, hygiene and home products.

The group’s $17bn acquisition of infant nutrition firm Mead Johnson in 2017 added the Enfamil formula brand to RB’s portfolio. Chief executive Rakesh Kapoor expects this business to deliver long-term growth.

Net debt rocketed from under £2bn to nearly £11bn to help fund this deal. However, with annual free cash flow of about £2bn, this level of debt looks manageable to me. I’m confident borrowings should soon start to fall.

A buying opportunity?

RB’s share price has fallen by more than 20% from its June 2017 peak of £81. A series of problems have slowed profit growth and broker forecasts for 2018 earnings have been cut by 10% over the last year.

However, the outlook has remained stable since the summer. Because the shares have fallen faster than profit forecasts, the stock now looks cheaper relative to forecast earnings. RB now trades on a 2018 forecast price/earnings ratio of 19, with a prospective yield of 2.7%.

Although I’d prefer a dividend yield closer to 3%, I rate RB as a high quality business with good long-term prospects. I’d be happy to buy a few shares at this level and tuck them away for my retirement.

A small-cap alternative

One small-cap company that’s stood the test of time is agricultural feed and engineering firm Carr’s Group (LSE: CARR). This business was founded in 1831, since when it’s grown into a £142m business with operations in the UK, USA, Germany and New Zealand.

Carr’s shares are up by 5% at the time of writing after the company’s full-year results clocked in ahead of analysts’ forecasts again.

Sales rose by 16.5% to £403.2m during the year to 30 September, while pre-tax profit was 45% higher, at £16.6m. Adjusted after-tax earnings rose by 56.2% to 13.9p per share, beating forecasts of 12.7p per share.

Last year’s strong profit growth is said to be the result of “improved farmed incomes” in the UK and a “recovery in US cattle prices”. Trading at the group’s engineering businesses has also improved, especially in the oil and gas sector.

Buy on the dips

This small business doesn’t enjoy the high profit margins earned by RB. But the firm’s profits are fairly reliable and it has a strong balance sheet, with net debt of just £15.4m at the end of September. Cash generation is also good and the dividend has been consistently covered by free cash flow in recent years.

At the time of writing, Carr’s stock trades on a forecast P/E of about 13 with a dividend yield of 2.8%. I rate the shares as a buy and would seek to build a long-term position by buying during future market dips.

The post Forget the cash ISA! One FTSE 100 dividend stock I’d buy for my retirement appeared first on The Twelfth Magpie.

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Roland Head 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.

The directors pushed up the interim dividend by a little over 13% and said that trading in the second half started well. They think the full year will see an outcome “slightly ahead of previous expectations,” and that could be the key phrase that is driving today’s positive share-price action.

Recovery and growth in both divisions

Last year, Carr’s earned around 93% of its operating profit from its agricultural operations and the rest from the engineering business. The agriculture division makes feed blocks for livestock, retails farm machinery and fuel, and operates around 43 rural stores in northern England and southern Scotland providing a “one-stop shop for the farming community.” The animal feed enterprise serves more than 50 countries via “a vast distributor network across the UK, Europe, Middle East and North America,” run by wholly owned and joint ventures in Britain, Germany and the USA.

Meanwhile, the engineering division makes equipment and provides technical engineering services for the nuclear, petrochemical, oil & gas, pharmaceutical, process and renewable energy industries. Although the two divisions seem unrelated, both seem to be enjoying a purple patch of trading. There’s an ongoing recovery under way from the firm’s US-based agriculture business, and Chief executive Tim Davies said, the strong results also reflect “the excellent recovery made in our Engineering division and builds upon the strategic progress made during the last year.”

Strategic acquisitions

That strategic progress includes four 2017 acquisitions. In the engineering division NuVision Engineering, a US-based technology and applications engineering company focused on commercial nuclear and power plant facilities, government waste remediation facilities and waste clean-up. In the agriculture division, certain assets from Mortimer Feeds, an agricultural merchant based in Cheshire, Horse and Pet Warehouse, a retailer of animal products for the pet, equine and smallholding market based in Ayr, Scotland, and Pearson Farm Supplies, an agricultural retail business with locations in Skipton, Gisburn and Anglesey.

It looks like the valuation is rushing to keep up with events. Today’s share price around 154p throws up a forward price-to-earnings ratio of just over 12 for the trading year to August 2019 and the forward dividend yield is around 2.9%. City analysts following the firm expect earnings to increase 34% in the current year and 7% to August 2019. Those forward earnings should cover the dividend payment almost three times. Even after today’s sharp move up, the valuation looks undemanding.

The dividend is up around 33% over the past five years and it wouldn’t surprise me to see more total returns for shareholders in the years to come, perhaps partly driven by an upwards revision in the valuation. After a long period of consolidation on the share price chart, perhaps the firm’s good trading will catalyse another leg up.                                          

The post Should you pile into Carr’s Group, up 12% today? appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

And this was underlined by the small-cap’s solid market update on Tuesday, the report sending the share price 12% higher.

Carr’s, which provides a wide array of agriculture-related goods, said during the 18 weeks to January 6 it was “trading in line with the Board’s expectations for the current financial year.” It added that trading is “significantly ahead of the prior year in both Agriculture and Engineering.”

At its Agriculture division, the Carlisle-based business said UK Agriculture had made a positive start to the year, noting that “improved farm incomes [are] continuing to reinforce farmer confidence.” It added that its retail business had made a solid start to the fiscal year with manufactured feed volumes rising year-on-year, while it also described machinery sales and UK feed block sales as “strong”.

The only blot came in the form of lower fuel volumes which was attributed to “milder weather and wet ground conditions affecting agricultural operations during the early part of the winter.”

At its Engineering arm, it said its UK Manufacturing operation are trading well ahead of the corresponding period a year earlier thanks to improved levels of activity.

A great all-rounder

This fresh trading news confirms the steady recovery in farming markets since the middle of last year, and gives forecasts of chunky earnings growth plenty of credibility

A 33% earnings improvement is forecast for the year ending August and this creates a dirt-cheap forward P/E ratio of 11.8 times. I reckon this figure could be upgraded as conditions improve at home as well as in its US marketplace.

What’s more, Carr’s could also be viewed as a compelling pick for income chasers today. Predictions of meaty profits growth are expected to keep sending dividends skywards and City analysts are predicting a 4.3p per share reward for fiscal 2018, up from the 4p dividend paid last year.

Not only does this projection yield a solid 3.1% but it is also pretty well protected with the target covered 2.8 times by earnings (comfortably above the widely-considered security watermark of 2 times).

Another growth giant

I reckon investors seeking cheap shares with robust earnings and dividend outlooks also need to pay Macfarlane Group (LSE: MACF) a visit.

In 2018 the packaging pay is predicted by the Square Mile to follow an anticipated 31% bottom-line improvement for last year with a 13% profits boost. And this leaves Macfarlane on an undemanding prospective P/E multiple of 11.7 times.

The Glasgow-headquartered business has been able to steadily lift dividends in recent years as earnings have relentlessly risen, and so a projected dividend of 2.1p per share for 2017 is predicted to rise again to 2.3p this year. Consequently Macfarlane sports a very decent 2.9% yield. Dividend coverage, meanwhile, rings in at 3 times.

I believe the outlook for 2018 over at Macfarlane can be described as pretty rosy. In November the business declared that “the momentum achieved in the first half of 2017 has continued in the second half of the year with improving organic growth and the continuing benefit from acquisitions.” This steady progress could also see analysts upgrade their profits projections for the near term and later.

The post Two secret growth stocks to watch in 2018 appeared first on The Twelfth Magpie.

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Royston Wild 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.

Despite occasional profit lumpiness from factors beyond its control, this FTSE SmallCap firm, which is valued at £130m, has nevertheless delivered an impressive annualised total return for shareholders of 12.9% over the last 10 years (compared, for example, with 11.7% from blue-chip luminary Unilever).

Bright outlook

After a challenging year, the 2018 outlook for Carr’s is considerably brighter. In its agricultural division, a recovery in the US started in H2 and improved farmer confidence is evident in the UK. Meanwhile in engineering, the delayed major contract has come through and with the group’s August acquisition of NuVision Engineering also providing a good foothold in US nuclear markets, strong top- and bottom-line growth is forecast.

The analyst at Edison, which counts Carr’s as a client, has upped her normalised earnings per share (EPS) forecast from 11.6p to 12.5p, representing 33% growth on 2017’s depressed EPS. This forecast puts Carr’s on an undemanding price-to-earnings (P/E) ratio of 11.4 and a price-to-earnings growth (PEG) ratio of 0.35, which is deeply on the ‘value’ side of the PEG ‘fair value’ marker of one.

A forecast well-covered dividend of 4.2p, giving a yield of close to 3%, adds to the value on offer and I rate the stock a ‘buy’.

Re-rating

Also offering great-value growth, in my view, is AIM-listed but long-established M. P. Evans Group (LSE: MPE). At a share price of 820p, this palm oil producer from plantations in Indonesia is valued at £450m.

You’ll probably recall that the market re-evaluated Unilver’s shares after the Anglo-Dutch group rejected a bid from Warren Buffett-backed Kraft Heinz earlier this year. A similar thing happened with M. P. Evans. The value of the London-listed company was markedly lower than that afforded similar firms listed in Asia and a bid came in from a Malaysian conglomerate at 640p a share, followed by an improved offer of 740p. The board, backed by major shareholders, rejected the offer, saying it “very substantially” undervalued the company.

Still undervalued

While the shares are now up to 820p, I believe M. P. Evans remains undervalued. For one thing, an independent assessment of its assets, which it commissioned at the time of the bid, gave its equity an implied value of 1,082p a share. For another, the current price looks to markedly undervalue the EPS growth in the offing. The consensus forecast is for a 39% increase to 31 cents (23.7p at current exchange rates), followed by a 52% rise to 47 cents (35.9p) for 2018. This gives a P/E of 34.6, falling to 22.8 and an attractive 2017/18 PEG of 0.44.

With additional value from a running dividend yield of 2.2% (excluding special dividends) and the board committed to paying “enhanced dividends,” this is another growth stock that looks very buyable to my eye.

The post These small-cap growth stocks could still make you incredibly rich appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.

However, if you pull back and take a longer view, you’ll see that this is still one of the best performing big UK utility stocks. The shares are still worth 30% more than they were five years ago. By contrast, SSE has only gained 5%. Centrica has fallen by 40%.

I think that the Grid’s recent decline is no bad thing. At May’s high of 1,157p, the forecast dividend yield had fallen to 4%. That seemed too low to me, given that the payout is only expected to rise in line with inflation.

At today’s price of 950p, National Grid now offers a forecast yield of almost 5%. I’d argue that’s about right. I’d be happy to buy the shares for income at current levels. But I also think it’s worth considering some of the limitations of this business.

The first is that this is already very large and mature. Although pricing power and profits are likely to keep pace with inflation, I don’t expect much more than this. Revenue has risen by an average of just 1.7% per year since 2012. Operating profit from continuing operations has fallen by an average of 1.9% each year over the same period.

Overall, I think National Grid is a great dividend stock, but I think that its growth potential is limited. If you’re looking for a great dividend stock with good growth potential, I have another suggestion.

Heading for new highs?

Carr’s Group (LSE: CARR) has a history stretching back to 1831. Today, it’s a group of agricultural feed businesses and engineering companies.

Carr’s share price got hammered in March, when the firm was forced to issue a profit warning. The shares have recovered somewhat since then but are still cheaper than they were at the start of the year. However, recent news from the firm could strengthen the upwards trend.

In July, an update confirmed that trading conditions were improving in the agricultural sector. The group’s engineering business has suffered as a result of the oil and gas downturn, but trading is healthy elsewhere and the division is expected to hit profit forecasts this year.

Carr’s is also working hard to diversify. The group announced a $20m acquisition of US firm NuVision Engineering today. This specialist business operates in the nuclear power sector. It gives Carr’s an entrance into the US nuclear market and expands the capabilities of its existing nuclear business.

This isn’t a big acquisition — NuVision generated revenue of $8.8m last year, compared to £315m for Carr’s. But I often prefer small, targeted acquisitions to larger deals. With good management, they can be a successful way to deliver market-beating growth.

The stock currently trades on a forecast P/E of 17, falling to a P/E of 13.5 for 2018 as profits rebound. The dividend yield of 2.8% may not seem very high, but the payout has not been cut since 2001, and should be covered twice by earnings. In my view, now could be a good time to buy.

The post This super small-cap could be a better dividend buy than National Grid plc appeared first on The Twelfth Magpie.

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Roland Head owns shares of Centrica. 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.

Until the downturn in oil & gas markets forced it into keeping dividend payouts level last year, energy consultancy RPS Group (LSE: RPS) had strung together 21 consecutive years of increased dividend payments. For any company exposed to the sector to even maintain payouts last year was a feat in itself and its 3.65% yield should not be sneezed at.

And half-year results released this morning bode well for income investors for several reasons. The first is that the interim payout was hiked from 4.66p to 4.8p year-on-year (y/y). The second is that management’s decision this time last year to halt acquisitions and focus on de-leveraging the balance sheet has worked well. The group’s net debt-to-EBITDA ratio has fallen from 2.2 times to 1.5 times y/y and management is now confident the balance sheet is healthy enough to increase dividends as well as to resume looking for suitable acquisitions.

With a resumption of the group’s acquisition-led growth policy, investors have good reason to expect rising earnings and eventually rising dividends in the near future. A return to buying up small consultancies in Europe, Australia and North America is also to be welcomed as it will allow the company to further reduce its dependence on the oil & gas sector. Management had already been doing this with all of its £124m spent between 2014 and 2016 on acquisitions directed to companies without direct exposure to oil & gas markets.

This strategy is already paying off as sales and profits returned to growth in H1 boosted by the weak pound and high activity from its property development and management businesses in the UK. With about 18% of fees in H1 coming from businesses in the oil, gas and Australian resources sector, RPS is still exposed to weakness in these markets. But with the balance sheet back in good shape, management looking forward to further acquisitions and a resumption of dividend payment growth, RPS could be a relatively safe way to gain exposure to these sectors for growth and income investors.

Too risky?

Another company with a solid history of dividend growth is agricultural products and engineering firm Carr’s Group (LSE: CARR), which from 2012 to 2016 increased dividends per share by 30% to 3.8p so that they now yield 2% annually.

Unfortunately, reliable dividend growth hasn’t been matched by stable earnings growth due to the cyclical nature of the agricultural bit of the business. As earnings from the agriculture division fluctuated based on dairy and raw material prices, they had an outsized effect on group results since they accounted for roughly 90% of revenue last year.

While the engineering division should be more reliable, it’s also not without its faults as a delayed contract caused a profit warning in March and led analysts to forecast a 20% fall in earnings for the current fiscal year. This contract has now been signed, but the delay will likely severely impact the already low group operating margins that were just 4% last year.

Stocks that are cyclical or very low-margin always make me apprehensive. The combination of both in Carr’s Group, together with a pricey valuation of 16 times forward earnings, will have me taking a hard pass on the company’s shares.

The post This high-yielding stock is trading at a bargain-basement valuation appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any 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.

Disappointing performance

Reporting on Monday was clothing retailer Bonmarché (LSE: BON). The company announced a fall in pre-tax profit of almost 40%, as like-for-like (LFL) sales growth turned negative. Even online sales failed to grow by as much as many of the company’s competitors have been reporting of late, with a rise of just 2.2% versus the prior year. This meant that total sales were only marginally higher, which is clearly disappointing for the company’s future outlook.

Despite this, the results were in line with expectations. It is currently in the midst of a major transformation programme which has the potential to significantly improve its financial performance. It is seeking to reboot its product offering, while also delivering an improved shopping experience for customers. It is attempting to boost customer loyalty through unlocking the potential of its Bonus Club loyalty scheme, while also improving efficiencies through new systems.

Looking ahead, Bonmarché is expected to report a rise in its bottom line of 27% in the next financial year, followed by 21% in the year after. This has the potential to boost investor sentiment in the stock – especially since it trades on a price-to-earnings growth (PEG) ratio of just 0.3. As such, and although the UK economy faces an uncertain future, now could be the right time to buy the stock for the long term.

Positive catalysts

Also offering strong growth potential is agriculture and engineering specialist Carr’s Group (LSE: CARR). It is expected to report a rise in its bottom line of 31% in the next financial year. This would come after a somewhat mixed period for the business, with its bottom line due to fall by 23% in the current financial year.

With Carr’s trading on a PEG ratio of 0.4, it seems to offer excellent value for money. Its margin of safety has been widened to at least some extent by a fall in the company’s share price of 8% in the last year, which has been a disappointing performance at a time when many stocks have been able to deliver strong capital growth.

Its outlook seems bright due in part to its low valuation and high growth prospects, but also because of its impressive income potential. Carr’s currently yields just 2.8%, but is forecast to increase dividends per share by 7% over the next two years. This means its income return should continue to beat inflation over the medium term. And since dividends are covered 2.7 times by profit, further growth in shareholder payouts could be ahead over the long run.

The post 2 growth stocks that could make you rich appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any 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.

Should this be a surprise?

Today’s profit warning was blamed on two problems, neither of which was a complete surprise.

In January, Carr’s warned of a “significant contract delay in the UK manufacturing business”. The firm said it was cutting costs and looking for short-term work to offset the impact of this delay. Unfortunately this hasn’t been possible, mainly because of low order levels from the oil and gas market.

The second problem is with Carr’s agricultural feed business in the US. Again, the company warned in January that “volumes and margins are expected to remain under pressure”. In today’s update, we learn that “recovery in that market is now expected to be slower than anticipated”. This is expected to reduce profits in the short-medium term.

In both cases, these risks were clear in January, but the market gave management the benefit of the doubt. That may have been a mistake, but the question for investors today is whether they should buy, hold or sell Carr’s.

Is there worse to come?

Unfortunately, Carr’s management didn’t provide any specific guidance on profit today. My reading of “significantly below” suggests that earnings could be as much as 20% below expectations.

If that’s the case, then Carr’s could report earnings of 8.6p per share for the current year, putting the stock on a forecast P/E of 14.4 with a prospective yield of 3.2%. That’s an attractive valuation, especially as the current share price of 124p is backed by Carr’s book value of 120p per share.

The group’s engineering business could pick up rapidly if the oil and gas market recovery continues. The risk is that management have already been shown to be too optimistic once this year. There’s a real risk that another profit warning could follow.

Carr’s is going onto my watch list, but I’m going to wait for the firm’s interim accounts on 12 April so that I can review the situation in more detail.

What about rivals?

Carr’s mix of engineering and agricultural feed businesses exposes it to several different market sectors. This makes it hard to compare with other firms. But one way to view Carr’s might be as a much smaller version of FTSE 100 conglomerate Associated British Foods (LSE: ABF).

Like Carr’s, ABF stock has lost 20% of its value over the last twelve months. The group — which owns grocery, ingredient and sugar businesses, as well as budget fashion retailer Primark — has faced difficult market conditions. However, trading does seem to be improving.

Analysts expect ABF’s adjusted earnings to rise by 15% to 119.5p per share this year. The dividend is expected to rise by 11% to 40.9p per share. These figures put ABF stock on a forecast P/E of 22, with a prospective yield of 1.5%.

Although I do think that ABF is a good business, I’m not sure that it’s worth paying this much for the shares. I’d hold for now.

The post Is Carr’s Group plc a falling knife to catch after dropping 20% today? appeared first on The Twelfth Magpie.

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Roland Head has no position in any 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.

A major disposal of one of Carr’s divisions this year has strengthened the balance sheet and delivered a substantial capital return to shareholders. It not only bodes well for the future of this £131m mini-conglomerate, but also shows how value can be unlocked at other multi-divisional companies, such as FTSE 100 giant GlaxoSmithKline (LSE: GSK).

Value delivered, prospects good

Carr’s disposed of its flour mills business for £35m gross (£25m net). Today’s results show net cash at the year end of £8m compared with net debt of £27m six months ago. However, since the year end, the company has paid a special dividend of £16m (17.54p a share) and made an acquisition for a net consideration of £6m, so the implied net debt is currently £14m.

Nevertheless, this level of debt is modest and gives Carr’s the opportunity to invest in its remaining agriculture and engineering businesses and to make further complementary acquisitions as and when appropriate.

Stripping out the earnings from the flour mill business, Carr’s delivered adjusted earnings per share of 10.9p for the year (up 7% on the previous year), giving a price-to-earnings ratio (P/E) of 13.6. Meanwhile, a well-covered ordinary dividend of 3.8p gives a handy yield of 2.7% with plenty scope for expansion.

Carr’s performance was robust in what was a challenging year for the agriculture and engineering sectors generally. The recent acquisition will be earnings neutral for the first year, but with organic investment and further acquisitions on the cards, growth prospects look highly promising for the medium term. As such, I believe a P/E of 13.6 represents good value and I rate Carr’s a ‘buy’ on this rating.

Look forward, not back

Compared with the 150% rise in Carr’s shares over the last 10 years, GlaxoSmithKline’s rise of less than 15% over the same period is rather poor. Of course, Glaxo is known as a generous dividend payer, but when you consider Carr’s ordinary dividends and the special payout following the flour mills disposal, the FTSE 100 firm’s total return still lags well behind.

Some of Glaxo’s major shareholders, including the redoubtable Neil Woodford, have been critical of the company’s strategy over the period. There have been calls for Glaxo to unlock value for shareholders in the manner that Carr’s has done with the sale of its flour division.

Woodford reckons Glaxo’s three divisions — pharmaceuticals, vaccines and consumer healthcare — would be valued more highly as standalone businesses by the market than they are combined together as a conglomerate. I think there’s considerable potential for a value-creative demerger of one or more of Glaxo’s divisions at some point. But I also believe that the group as it is now could perform far more strongly in the next 10 years than it has in the last 10.

This is because Glaxo has just been through a tough period of patent expirations, but has now turned the corner, with revenue and earnings set to return to growth this year. At a current price of 1,540p, Glaxo is on a prospective P/E of 15.5 with a 5.2% dividend yield. For a top blue chip, with value that could be unlocked at some point by corporate activity, I believe the shares are very buyable at their current level.

The post Could GlaxoSmithKline plc learn something from Carr’s Group plc? appeared first on The Twelfth Magpie.

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