600 Group out, Barratt Developments in

Sunday, Nov 21 2010 by
600 Group out Barratt Developments in

As I said in the last post, the fact that earnings can impact company valuations has finally entered my brain and caused a cascade of activity in my once quite and peaceful fund.  The turmoil began with the 600 Group. I first bought 600 Group back in December 2008 when it was trading at a sizeable discount to tangible assets.  Gearing was low and liquidity was good and that was enough for me.

However, things move on and now I look at returns on equity as well as book value, gearing, liquidity, etc.  Over the longer term the ROE for this company are frankly appalling and the economic value of the company's assets is much less than their book value.  For example, ROE10 is -0.5%, ROE5 is -2.4% and the current ROE is -14.5%, none of which screams of success.

I realise of course that this is massively oversimplifying things, but unless you have a brain the size of a planet then pretty much any analysis you do is a massive simplification of reality.

So 600 Group (LON:SIXH) departed with a total gain of 4.2% in almost 2 years, to be replaced with Barratt Developments. 

Barratt Developments Plc (LON:BDEV) is a very different company to what I've invested in before.  Yes it is trading below book and tangible book, it has reasonable debt and liquidity, but what makes it different is its size.  The market cap is £723 million and the net asset value is over £2 billion.  That puts it well outside of my usual small cap zone.  But in terms of what I'm buying I am much happier.  Price to book and tangible book are lower than with 600, but also ROE10 and ROE5 are better at 14.3% and 7.3% respectively, including the negative values of the last two years.

It is cheap for various reasons: the housing market, the economy, the recent rights issue, the level of debt they took on at the peak of the market, etc etc.  But as of now I think it has a good chance of outperforming over the next year or three. 

And because everybody else seems to, I'm going to include a target price.  As of now my target price…

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This article is for information and discussion purposes only and nothing in it should be construed as a recommendation to invest or otherwise. The value of an investment may fall and an investor may lose all their money. Any investments referred to in this article may not be suitable for all investors.  Investors should always seek advice from a qualified investment adviser.

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Barratt Developments PLC is a holding company. The Company is principally engaged in acquiring and developing land, planning, designing and constructing residential property developments and selling the homes, which it builds throughout Britain. The Company operates in two segments: Housebuilding and Commercial developments. Its housebuilding segment operates through approximately six regions and approximately 30 operating divisions delivering over 17,319 homes. Its Commercial developments are delivered by Wilson Bowden developments. It purchases land in targeted locations and designs homes for its customers using standard house designs. Its brands include Barratt Homes, David Wilson Homes and Barratt London. Its Barratt Homes brand focuses on making homes. Its Barratt London brand portfolio offers apartments and penthouses in Westminster to riverside communities in Fulham. Its David Wilson Homes brand offers home design and specification, and focuses on developing family homes. more »

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The 600 Group PLC is engaged in designing and distribution of machine tools, precision engineered components and the design, manufacture and distribution of industrial laser systems. It operates in two segments: Machine tools & precision engineered components, and Industrial laser systems. It designs and develops metal processing machine tools sold under the brand names Colchester, Harrison and Clausing. The Company designs and manufactures precision engineering components under the brand names Pratt Burnerd and Gamet. The Company's Laser Marking includes Electrox and TYKMA. Its Machines Tools products range from small conventional machines for education markets, Computer Numerical Control (CNC) workshop machines and CNC production machines. The Company operates its businesses from locations in North America, Europe and Australia selling into over 180 countries across the world. more »

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  Is LON:BDEV fundamentally strong or weak? Find out More »

2 Comments on this Article show/hide all

Shocker 13th Jan '11 1 of 2

Just come across this... I have a question : I'm familiar with book value and getting familiar with ROE. I'm not so clear on gearing yet, and not sure what you mean by liquidity. Could you please explain? Just briefly, for a novice. I understand net cash/debt but am guessing you mean something else. Also, what other measures do you look at, or which are your higher and lower priority measures?

Thanks... I'm learning to become a good stock-picker one step at a time :)

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UK Value Investor 19th Jan '11 2 of 2

In reply to post #52460

Hi Shocker. By gearing I mean how much interest bearing debt the company has relative to equity, i.e. the ratio of net debt to equity. Net debt is interest bearing debt minus cash equivalents. Typically more gearing equals more returns and more risk, but of course there's a lot more to it than that which I generally ignore.

Liquidity relates to the ability of the company to stand up to a cash shock, either from a collapse in sales or some big cash payment that must be met. The ratios are current ratio (current assets to debts) or quick ratio (as current, but only counts cash equivalents as assets, not inventory etc).

They are both basically checks on the 'robustness' of a company, which is handy when you're buying a 'stressed' company, i.e. a cheap one.

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About UK Value Investor

UK Value Investor

My name is John Kingham and I'm the editor of UK Value Investor, a blog and investment newsletter for defensive and income-focused value investors. I'm also the author of The Defensive Value Investor.I invest mostly in large and mid-cap dividend-paying stocks. My investment goal is to build and maintain a high yield, high growth, low risk portfolio. more »


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