The rest of this week’s shares: easyJet, Intec, Ransom
Posted on January 22, 2009 by Richard Beddard
Filed Under Companies |
Horny goat weed not doing it for me, yet
easyJet (EZJ)
Despite news today that easyJet is nicking passengers from weaker and more expensive rivals in a kind of flight away from quality, I’m a bit surprised by investors’ enthusiasm for the budget airline.
Maybe there’s still a cachet to owning shares in an airline, or maybe investors believe that the low-cost revolution has further to go. Whatever the reason, they’re prepared to pay a handsome price for easyJet shares. Its long-term price earnings ratio is about 15.
That’s another way of saying that if easyJet’s annual earning power is the average of its last nine years of profits, the return on its current share price (earnings yield or earnings per share divided by the price) should be around 7%.
It’s not a great return, although I might accept it, if I thought the prospects for future earnings growth were very good. But we’re going into a recession, airlines are a notoriously cyclical business, and although easyJet has more than doubled its profits since it listed on the stockmarket in 2000, it’s been an up and down story.
I’m not an aviation expert but founder and major shareholder Stelios Haji-Ioannou is. He’s agitating the board to plot a more conservative path through recession by ordering fewer planes, conserving cash and committing to paying a dividend.
It sounds like a maturing business, and possibly a very good one to own – if I could pay less for it.
EasyJet’s share price is lower than when it floated, and I fear that might continue to be the case. Even if it emerges from a couple of difficult years a winner, I’m not sure shareholders will.
Intec Telecom Systems (ITL)
Intec is another one on a long-term price earnings ratio of 15, one stop off the top of my buy-zone, an ltpe of 16.
Intec engineers and manages billing software for telecoms companies and lists many blue chips as clients, companies like AT&T, Vodafone. Its software collects the data from networks, works out how much customers need to pay and send out bills, as well as performing other functions like activating handsets.
With the convergence of mobile, fixed-line telecommunications, internet and TV it’s easy to imagine this is a growing sector, at least in complexity, but although Intec has little debt, its chequered record of profits makes me doubt whether it’s truly growing, and therefore it’s too speculative for me.
Ransom (RNSM)
William Ransom makes and sells natural healthcare products. If it contains aloe vera, Australian tea tree oil, or horny goat weed*1, it may well come from Ransom. Last year it sold off Radian, the muscle rub, to pay back debt.
That’s because the company almost went bust. Last year, it temporarily lost its manufacturing license when inspectors found bacteria in distilled water, and profits have declined after a series of acquisitions. It breached its bank covenants at least twice, and is only trading thanks to Barclays - the bank can demand repayment of its overdraft at any time. With the run on Barclays shares in recent days, one might wonder which will last longer!
Glancing through the annual report, it seems that the company’s new board are taking radical steps to turn Ransom around, reducing the number of brands it sells, focussing on efficiency and paying back debt. But despite all that, and chief executive Ivor Harrisson’s purchase of nearly £100,000 worth of shares, the company’s precarious financial position*2, means it’s one to watch, not to buy, for safety-first investors.
Pick of the week?
So three someday/maybe stocks means I’m short of a pick of the week. Yesterday’s stocks, Carluccio’s and DMGT, seem more promising. DMGT’s price is firmly in the buy-zone, but Carluccio’s is a relatively uncomplicated story. So Carluccio’s it is..
Footnotes:
- Seriously, it’s an aphrodisiac
- It has an F_Score of three, which puts it right in the danger-zone.
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