UK Edition
Questor: its share price has dropped by a third – but there are many reasons to own CVS
This particular column is painfully aware that it is having a poor run, with a cautionary trading statement from acquisitive veterinary services provider CVS the latest stock to leave us with a nasty bite.
While they are almost inevitable, such bad trots are not pleasant and the key under such circumstances is to stick to the processes and disciplines that have worked well in the past. That means keeping a checklist of why a stock was viewed favourably (or not) and using that to see whether the fundamental investment case has changed, rather than just the share price.
In this case, CVS still has a strong competitive position, sound finances and healthy profit prospects. This column is therefore going to keep its faith in the Suffolk-headquartered firm, even if the shares were thumped when an update released alongside the showed a slowdown in like-forlike sales and flagged rising wage owing to a shortage of clinicians in the UK.
This will be a good test of the company's model as management is planning price rises to cover the increased costs. If they stick, our thesis remains intact and despite the near-term uncertainties the dependable nature of demand for companion animal care should still translate into robust cash flow, especially as CVS's pet scheme memberships provide solid support earnings.
A forward price-to-earnings ratio of times shows the stock is best to growth-oriented investors such a lofty multiple means any disappointment could be treated, so value seekers are to look elsewhere.
Questor says: We tipped CVS as " in January and May this year. It remains a "hold". Demand for its services remains strong, so this could prove to be a buying opportunity.
Ticker: CVSG
Share price at close: £10.54
Key numbers
Market value: £673.7m
Last full-year dividend: 4.5p
Yield: 0.5pc (2018 estimate)
Turnover: £316m (2018 estimate)
Pre-tax profits: £38m
Net debt: £100m
Return on capital: 8.8pc
Cash conversion: 99pc
P/E ratio: 21.5
Update: Saga
This column gormlessly thought it knew better than colleague James Ashton when it ran its rule over travel, leisure and financial services provider Saga, and is now left to unravel a sorry tale at the FTSE 250 firm after last week's (Dec 6) profit warning badly holed the cruise-ship owner's shares.
The £2m in costs incurred when Saga had to help out customers who were stranded by the collapse of Monarch Airlines is no great sum in the grand scheme of things. Of greater concern is the comment from chief executive Lance Batchelor about tough trading in insurance broking, an area that is likely to be under attack from price comparison sites and whose fortunes must therefore be tracked closely.
However, the 20pc-plus share price plunge in response to a warning that profits will be flat this year and down 5pc next still feels like an overreaction from a market that is proving very intolerant of even minor disappointment. With 1,120m shares in issue, last year's 8.5p dividend cost £95m. This looks eminently affordable given operating profit will be in the £180m range next year, based on the trading alert, with capital expenditure of £60m, and tax of £32m. An unchanged 8.5p payment would equate to a yield of 6pc.
Questor says: hold. This is a setback but the yield should start to provide support to the shares.
Ticker: SAGA
Share price at close: 129.4p
Update: Ladbrokes bond
Online bookmaker GVC is launching the next wave of consolidation of the betting industry with its proposed £3.4bn cash-and-stock offer for Ladbrokes Coral. While our Ladbrokes Group Finance 5.125pc 2022 bond did not shoot higher like the target's shares, the bond should continue to do a job for us by safely delivering coupons of £5.12 ½p a year, not least because GVC has relatively little debt.
There is another wrinkle, however.Helpful research from broker Canaccord Genuity reveals that GVC will have an option to retire the bond early, if it decides it would rather not pay the coupons. The price would be calculated based on the comparable UK Government bond yield plus 0.50pc. At current levels that would equate to a bond price of nearly £118.50.
Questor says: hold
Ticker: LAD2
Price at close: £108.50
Russ Mould is investment director at AJ Bell, the stockbroker