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Questor: buy CVS, a fast-expanding business that’s immune from the economic cycle
Finding a company with a strong competitive model that can lead to healthy profits and be scaled up relatively cheaply is the holy grail of investing, especially if the stock is decent value too.
Veterinary services group CVS is the leading player in its field in Britain, generates good earnings and copious cashflow and is busily consolidating its position in its home territory while it starts to build a presence in the Netherlands with carefully chosen and priced acquisitions.
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The only cloud is a lofty valuation at around 31 times this year’s earnings and 29 times next. But earnings momentum is strong and those multiples could drop sharply as the company expands.
The business is underpinned by dependable demand for veterinary services, which are generally not too affected by the ups and downs of the economic cycle. On top of that come the acquisitions.
CVS has already added 33 surgeries during the fiscal year that ends in June, including initial forays into both Holland and Northern Ireland, taking the total to 394. More deals, and more new countries, are likely and an equity fund raising just before Christmas of almost £30m, plus the company’s own free cashflow, gives it plenty of firepower.
The company tends to wait for clinics to come up for sale, so it can cherry-pick the best sites and pay a sensible price. Acquired surgeries keep their own name but benefit from the scale and support of the CVS organisation, which takes care of the back office and training and drives better sourcing through bulk buying, to the benefit of profit margins.
Questor says: buy
Ticker: CVSG
Share price at close: £13.34
Update: TalkTalk Telecom
Even after a deeper-than-expected dividend cut, a gloomier-than-expected profit forecast and a thumping share price fall on the day of the full-year results, shares in TalkTalk Telecom have gained 10pc since our analysis of the stock in February.
Better still, that should get a lot of the bad news out of the way as the new management team of Sir Charles Dunstone, executive chairman, and Tristia Harrison, chief executive, has taken the short-term pain that could help to put the company back on to the path to growth. As we suggested at the time, TalkTalk’s 8pc-plus dividend yield four months ago was in “too good to be true” territory, especially as earnings failed to cover the pay-out.
That said, the cut in the 2018 dividend to 7.5p (from 10.29p in the year just ended and 15.87p before that) was dramatic. Nevertheless, the new planned pay-out still offers a yield of 4.1pc and the reduction frees up cash to allow Dunstone and Harrison to invest in the business and rejuvenate its service and brand, as well as tackle its debts.
Sir Charles’s 30pc stake dates back to his Carphone Warehouse days and means he has every incentive to turn the business around, while his record shows that he is not afraid to buy or sell assets. It could therefore be just a matter of time before analysts start to ponder whether TalkTalk could be a bid candidate. Any profits recovery will be hard fought, given the competitive nature of the telecoms industry, but the new management’s plan appears to be the right one.
Questor says: buy
Ticker: TALK
Share price at close: 184p
Update: National Grid
Last week’s full-year results from National Grid met expectations as stated profits before tax fell by 3pc to £3bn and the ordinary dividend was increased by 2pc to 44.27p. That is enough for a 4.2pc yield in its own right. On top of that payment comes the proposed 84.375p-per-share special dividend, which will be paid on June 2 and funded by last December’s sale of a 61pc stake in its gas distribution business.
That takes the total yield for last year to more than 12pc and represents a tidy return for us. But the stock appears to be a solid income option, given the management’s target to grow the dividend in line with the retail prices index in future.
The company will also replace every 12 existing shares with 11 new ones in a consolidation when it issues the special dividend.
Questor says: hold
Ticker: NG.
Share price at close: £10.63½
Russ Mould is investment director at AJ Bell, the stockbroker