Small Cap Value Report (15 Sep 2016) - NXT, CRAW, FRP, IND

Thursday, Sep 15 2016 by

Good morning!

There are some interesting announcements from large retailers today. It's worth checking these, to see how overall market conditions are faring.

Next (LON:NXT)

Share price: 5040p (down 3.3% today)
No. shares: 147.3m
Market cap: £7,423.9m

Every time I look at results from Next (LON:NXT) it reminds me just what a high quality business this is. The profit margin is spectacular. What this means, is that even when trading deteriorates, the business remains very strongly profitable. This is an important point to grasp, because at the opposite end of the spectrum people often buy poor quality retailers because they are on a low PER. However, profits can quickly turn into losses for low margin, poor quality retailers, in a downturn. Whereas a super-high margin business like Next can sail through a downturn with the bulk of its profits intact, because its operating margin is so high at around 20%. Even if it were to drop to 16%, you would still have a very profitable company.

Next describes current trading as "challenging and volatile". It is adding lots of new space, and with such good ROCE and short payback times, this makes a lot of sense. Continued share buybacks drive up EPS, even when profit is flat, or slightly down.

There are a number of headwinds though;

  • Struggling to recruit new customers for its credit offering.
  • As with all retailers, the cumulative impact of Living Wage is likely to hurt.
  • Rapidly growing online competition is relentlessly chipping away at the market share of traditional retailers.
  • Weaker sterling means cost prices rising next year.

For these reasons I'm reluctant to buy shares in Next, although on a PER of about 10-11, it's very tempting. The trouble is, it's difficult to see much future upside on profits. So as a mature business whose profits may have arguably peaked, perhaps the price is right?

Generally, I'm keeping away from opening any new positions in conventional retailers. I think online is gathering momentum at such a rate, that it's starting to seriously disrupt the sector. Companies like Boohoo.Com (LON:BOO) can dramatically undercut the High Street on pricing. A younger generation is increasingly happy buying frequently & cheaply online, which presents massive problems for conventional retailers.

Crawshaw (LON:CRAW)

Share price: 44.5p (down 39.5% today)
No. shares: 78.9m

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NEXT plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with approximately 200 mainly franchised stores; NEXT Sourcing, which designs and sources NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores and Website, to wholesale customers and to franchise partners. The Company's franchise partners operate approximately 180 stores in over 30 countries. more »

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Crawshaw Group Plc is a United Kingdom-based company, which operates a chain of meat-focused retail food stores. The Company has approximately 40 stores, which are located across Yorkshire, Lincolnshire Nottinghamshire, Derbyshire and the North West. The Company's product range is categorized into approximately two distinct areas, such as Traditional raw meat, and Hot and cold cooked food. Under the Traditional raw meat category, it offers various products sold either loose in a serve over counter for the traditional experience or as multi buy packs on supermarket style multi deck counters, which have all been cut and packaged in store. Under the Hot and cold cooked food category, it offers freshly prepared roast chickens, gammon and pork joints, hot roast sandwiches, shop cooked curries and casseroles, chicken and chips, as well as other traditional deli products. Its stores include Arndale Centre in Arndale; The Arcades in Ashton Under Lyne, and Fresh Meat Factory Shop in Astley. more »

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Fairpoint Group plc is a United Kingdom-based company, which provides consumer professional services, including legal services, claims management services and debt solutions. The Company has four segments: claims management, legal services, individual voluntary arrangements (IVA) and debt management plans (DMP). The IVA segment consists of the subsidiary company, Debt Free Direct Limited, which is an IVA that consists of a managed payment plan providing both interest and capital forgiveness. DMP services segment consists of the Company's subsidiary, Lawrence Charlton Limited, which provides DMP for consumers. Claims management segment provides a range of claims management services, including reclaiming payment protection insurance (PPI). The legal services segment provides a range of consumer-focused legal services with lines, such as family law, complex personal injury, personal legal services, and a legal processing center focused on both personal injury and conveyancing work. more »

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

52 Comments on this Article show/hide all

danyou 15th Sep '16 1 of 52

Paul, I wonder whether you have noticed the results from the newly listed Franchise Brands (FRAN). This is an interesting company mostly because of the team running the show- Nigel Wray and the team that developed Dominos Pizza into a giant franchise.
They have now listed this business that runs 3 separate cleaning and repair franchises that seem to be growing very nicely with EPS growth of 18%, net in cash, and even with this growth has a PER of c16.8. No dividends yet, but has promised an announcement on their first dividend in the coming months.
The calibre of the team is what makes this particularly interesting IMHO and the relatively undemanding PER for a quality growing business.

Declaration: I hold FRAN

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PeterW 15th Sep '16 2 of 52

Paul, Could you ask all your readers to phone the FCA and complain when a pre announcement price move like Crawshaw's points to insider dealing. The number is ......... "Call us on 0800 111 6768 (freephone) or 0300 500 8082 from the UK, or +44 207 066 1000 from abroad. We are open Monday to Friday, 8am to 6pm and Saturday 9am to 1pm." It is only pressure from us that will get them off their backsides!

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Carcosa 15th Sep '16 3 of 52

Sometimes I come across something that I feel is important but don't have the where-with-all to grasp it and apply the knowledge elsewhere. That is where I am with Next (LON:NXT). In their PDF version (graphics etc) a great deal of useful information is presented especially relating to the online business development and currency exchange rate effect (pages 12-16).

Overall it gives me the impression that they have finally woken up to how important this is but because they are so late to the party their experience has left them short on what exactly to do and how to implement it. At times it reads they are a bit lost and not in total control. Whereas the likes of Boohoo.Com (LON:BOO) appear to have that side of the business banged to rights and Boohoo are concentrating on scaling the business up.

These results from Next provide confidence that it is the likes of Boohoo who are the better investment (in terms of share price) over the next 2-5 years.

I wonder if 2016/17 will be looked upon in years to come as confirmation that high street fashion shops are going the way of traditional butchers ;-)

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andrea34l 15th Sep '16 4 of 52

I'm surprised that you didn't cover GFRD results yesterday considering your coverage post-Brexit and purchase therein.

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gus 1065 15th Sep '16 5 of 52

Morning Paul.

Thanks for the thorough and timely write up on both Crawshaw (LON:CRAW) and Next (LON:NXT) . Good to see it out so early given the volatility in the two stocks covered. Personally, I didn't think the Next report was too bad - as ever the quality of the information is spot on and I've got used to the rather dour tone of their headline summaries; since the headline is what tends to be reported by the likes of the BBC business coverage, there seems to be a pattern of immediate sell off then claw back on due reflection of the numbers. One big plus seems to be the strength of their online offering if this is the way fashion retailing in the UK is headed.

On Crawshaw (LON:CRAW) not sure what to make of the release, other than it reads like a piece of homework dashed off by someone on the bus on the way into school without too much care or attention. I sense maybe it had to be rushed out early because of news leaking to the market yesterday afternoon. Glass half empty says they're clutching at straws to find excuses for a broken business model. Glass half full says they're on the ball and are adapting the model to continue recent growth success. Falling knife or a bargain?

I've been watching the stock for a while but been put off by the very high premium. For better or worse, I've given management the benefit of the doubt and taken an entry position this morning at a c.50% discount to the price this time last week.



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JohnEustace 15th Sep '16 6 of 52

Ricardo (LON:RCDO) are up 10% on strong full year results today.
I gave in to the temptation you resisted in July and bought a few to tuck away so thanks for highlighting them.

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Paul Scott 15th Sep '16 7 of 52

In reply to post #150438


Re Galliford Try (LON:GFRD) - I only cover large caps by exception, if there's something particularly topical going on. Plus of course retailers, as that's my sector specialism.

So just because I've mentioned something here once, doesn't mean that I'll necessarily mention it again.

Each day I skim through lots of RNSs, then pick ones to write about here that I think look the most interesting/topical, and which have most potential upside, or downside risk.

I always try cover small cap profit warnings, so we can all learn from them, and identify any read-across to other stuff in our portfolios.

My general theme of buying bombed out housebuilders after Brexit has been very successful, but personally I've moved on now. Other fish to fry!

Regards, Paul.

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herbie47 15th Sep '16 8 of 52

In reply to post #150450

Paul, I see Fairpoint (LON:FRP) half year report is out today, they report slowdown in housing market and mortgagees.

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MrContrarian 15th Sep '16 9 of 52

Crawshaw (LON:CRAW) - Disappointing to see an experienced Chmn like Richard Rose & ex-LIDL CEO issue an RNS that doesn't ring true.
Would have to be much cheaper for me to buy now.

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MrContrarian 15th Sep '16 10 of 52

In reply to post #150432

Or email

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Disco Ball 15th Sep '16 11 of 52

"aggressive meat promotions" that sounds very scary!

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paraic84 15th Sep '16 12 of 52

In reply to post #150453

I think that's the blame for the fall in SP today isn't it? (All the other bad news was known before as far as I can make out). Personally I am not worried about the fall in conveyancing business as I think that will be short-term.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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