Growth or income? Whatever you prefer, one place to seek them is among depressed companies that are putting in a solid recovery.
A great year
And I’m impressed by the job that John Menzies (LSE: MNZS) has been doing — after several years of falling earnings, the turnaround looks like it was well under way in 2016. Underlying pre-tax profit for the year to December rose by 30% to £49.7m (up 17% in constant currency), with underlying earnings per share up 26% to 47.8p and the dividend lifted 10% to 18.5p.
The share price lost a few pence in morning trading, to 575p, but after a near-doubling since December 2014, I can understand a bit of profit-taking.
The year was described as transformational, with chairman Dr Dermot F Smurfit telling us that the company completed the acquisition of ASIG on 1 February 2017 (which was part funded by a rights issue). And he talked of underlying profits at Menzies Aviation being “significantly ahead of last year at constant currency” while also being boosted by favourable exchange rate movements.
Menzies Distribution performance was broadly in line with the previous year.
With the board being “confident with the group’s outlook for 2017,” and City analysts forecasting a 12% rise in EPS for 2017 (followed by a further 11% in 2018), I see the shares as still offering good value despite the strength of their recovery to date.
We’re looking at forward P/E multiples of 11 for this year and 10 next, with PEG ratios of around 0.9. I can’t help feeling there’s some retail pessimism built into the price right now, and the company did speak of “increased cost pressures” in its Distribution division.
But I see investors as being unduly negative towards John Menzies right now, and I reckon in five years time we’ll be looking back at a bargain purchase.
Retail competitor
Perhaps the obvious comparison to John Menzies is retail competitor WH Smith (LSE: SMWH), though it doesn’t have quite the same diversification and is perhaps more at risk from retail pressures.
The WH Smith share price has been a bit erratic over the past 12 months, but over five years we’ve seen a 218% gain to today’s 1,747p. And though the high street might be facing its own problems, WH Smith has managed to keep its annual earnings per share growing nicely.
Results for the year to August 2016 looked good, with headline pre-tax profit up 7% and headline EPS up 9%, and the dividend was hiked by 11% to a yield of around 3%. On top of that, the firm announced a £50m share buyback and has been hoovering them up ever since.
Perhaps surprisingly in these early Brexit days, Smith’s travel business did very well with a 9% rise in profits.
What do the shares look like as an investment now? Well, I think new investors now have missed the recovery, and with the shares on P/E ratings of around the 16-17 level for this year and next, I don’t see a great bargain here.
I do see WH Smith shares as fair value for a healthy long-term investment, but with the economic uncertainty we’re almost certainly going to be facing over the next few years, I’m not seeing much of a safety buffer in the current valuation.
I wouldn’t sell WH Smith shares if I owned them, but if buying, I’d prefer to put my money into John Menzies right now.