SIF Portfolio: I'd like to bend the rules for Carr's Group

Wednesday, Aug 09 2017 by
8
SIF Portfolio Id like to bend the rules for Carrs Group

A more experienced and successful investor than me once said that he didn’t like to look too hard for new stock ideas. If they didn’t come onto his radar, they probably weren’t worth pursuing.

That’s not an approach that will work for everyone, but it has worked quite well for me over the years. I think another way of looking at it is that it is often best to restrict your investments to stocks and situations with which you’re familiar. Hunting down obscure ‘opportunities’ outside your normal investment universe can end badly.

One company that’s appeared on my investment radar over the last few months is agricultural feed and engineering conglomerate Carr’s Group.

The stock fell by 15% in one day in March after a profit warning. But the shares have bounced back nicely and are now pretty much flat on a year-to-date basis. The firm’s interim results in April didn’t reveal any nasty surprises, and nor did July’s trading statement.

In the meantime, Carr’s has come within a whisker of qualifying for the Stock in Focus screen. As things stand, the stock falls short in just one area:

598ade8f58d23carr-sif-checklist-080817.p


Earnings yield (EBIT/EV) is one of the most important metrics in my screen. My bias as a value investor means that I like to buy stocks where the company’s earnings are going cheap. Comparing operating profit with enterprise value (market cap + net debt) is a neat and effective way to do this, in my view.

However, I estimate that the share price would only have to fall from the last-seen level of 145p to 139p to qualify for my screen. Arguably that’s too small a gap to worry about, especially as the spread on this stock varies widely, and can be significant. Minimising the spread could be more profitable than waiting for the price to fall, in terms of future returns.

My challenge this week is to decide whether to bend my rules slightly and add Carr’s to the SIF portfolio.

Is Carr’s really a Super Stock?

As regular readers will know, the SIF portfolio is a rules-based portfolio. So if a stock passes all my screening tests and meets my diversification requirements, it’s likely to end up in the portfolio.

I don’t choose stocks based on their StockRank, but…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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Carr's Group plc is engaged in the agriculture and engineering activities. The Company's segments are Agriculture and Engineering. The Agriculture segment includes the sale of animal feed and feed blocks together with retail sales of farm equipment, fuels and farm consumables. The Engineering segment includes the design and manufacture of bespoke equipment for use in nuclear, oil and gas, and petrochemical industries. Its products include manipulators, robotics, specialist fabrication and precision machining. The Company's agriculture division develops and supplies a range of branded animal nutrition products into the livestock industries, as well as services the United Kingdom farming and rural communities through a network of retail stores and fuel businesses with manufacturing locations in the United States, United Kingdom and Europe. It is focused on the design and manufacture of pressure vessels and steel fabrications. more »

LSE Price
143.5p
Change
 
Mkt Cap (£m)
131.2
P/E (fwd)
13.0
Yield (fwd)
2.9



  Is Carr's fundamentally strong or weak? Find out More »


8 Comments on this Article show/hide all

Hot Socks 9th Aug 1 of 8
1

I think the nterested to see how Carr's works out for you. I was a holder but was already considering selling when the profit warning happened in March so I ditched them then. I got sceptical basically with the levels of capex combined with a fairly lacklustre ROCE and margins and also the fact that the dividend always looked well covered by earnings but not by free cashflow, so there wasn't much prospect of it growing. It looked like a business that required a lot of cash investment but didn't generate great returns.

They have made some acquisitions in the robotics space so there could be some upside if that is successful.

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Roland Head 9th Aug 2 of 8

In reply to Hot Socks, post #1

Hi Hot Socks,

Definitely agree that there are downside as well as upside risks with Carr's (LON:CARR).

Capex seems to have fallen in recent years while free cash flow has improved. It will be interesting to see whether this has any apparent effect on the outlook for growth. I'm broadly positive on the firm's strategy of making small, targeted acquisitions, but it's not without risk.

We'll have to see what happens..

Regards,

Roland

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aflash 9th Aug 3 of 8
1

From Technical Analysis point of view: rising Higher Los since April.
Support 144p.
Do not want to pay more. May have to because of spread.

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JohnEustace 9th Aug 4 of 8
4

I can't get my head round the logic of combining an animal feed business and a nuclear / petrochemicals engineering business. At the least it makes valuation difficult and probably means the whole is valued at less than the sum of the parts.

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herbie47 9th Aug 5 of 8
2

I don't really understand the attraction, not sure why you are bending the rules to include Carr's (LON:CARR). If you exclude the Earning Yield rule you will get many new companies, that's why most of the ones I tested failed on. I'm with Paul on this one, low margin, already had 1 profit warning this year, I can see things could go wrong again, animal feed is a fickle business. Carr's (LON:CARR) also fails on spread today.

How about Synthomer (LON:SYNT) that has Earn Yd of 7.98%

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johnbush 14th Aug 6 of 8

I see the Screen for this offers 177 companies. I am new to this but what other criteria are you using to cut the choice of portfolio down to such a small selection?

| Link | Share | 1 reply
Roland Head 14th Aug 7 of 8

In reply to johnbush, post #6

Hi John,

The screen I am using is my own Stock in Focus screen. You can see the current results and the criteria I use here:

http://www.stockopedia.com/screens/stock-in-focus-screen-113218/

26 stocks qualify at the moment, many of which you will see are in the SIF portfolio:

http://www.stockopedia.com/fantasy-funds/stock-in-focus-portfolio-6449/

Regards,

Roland

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johnbush 15th Aug 8 of 8

Many thanks Roland
John

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About Roland Head

Roland Head

Private investor & writer on stock markets with a particular fondness for free cash flow, dividends and value, plus an interest in resource stocks.In earlier life, I worked as an engineer in telecoms and IT. The quantitative, rule-based mindset required for this type of work is probably reflected in my investment style. Another factor that affects my investment choices is my experience working for a large telecoms company at the turn of the century, when tech stocks were booming. Watching this bubble inflate and then implode from the inside was very educational. more »

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