The Week Ahead: 16-20 December (TSTL, DOTD)

Good afternoon and welcome to the Week Ahead.

We’re in the official run down to the end of the year, with very few company announcements in the schedule. In fact, I would say we’re getting to the time of year when companies scheduling announcements may be doing so in the hope that at this time of year, no one cares. Look out for dividend cuts and minor profit warnings from some low profile companies!

We’re also at the time of year when it is definitely acceptable to watch Trading Places. Which is, in my opinion, the best investing film.

Thank you all for your engagement and suggestions on last week’s article. I’ve started trying to address some of those requests:

• GSK analysis - I have taken a closer look at the investment case of the British pharma giant. You can read my verdict here.

• Garmin - I have started delving into the investment case and have added the company to my 2025 watchlist. I’ll look to publish my thoughts in detail over Christmas. Incidentally, Garmin is also on my Christmas list.

The week in review

No signs yet of a Santa Rally.

Interest rate cuts in the Europe provided some stimulus to the Stoxx on Wednesday. While the tech-heavy Nasdaq Index hit historic highs on Thursday when it opened trading north of 20,000 for the first time ever. 

Both the US and UK interest rate decisions are due next week and current thinking is that while the Federal Reserve is likely to trim rates, the Bank of England will be holding firm. Lower borrowing costs could yet provide some more sparkle to the US, but London’s markets continue to provide slightly less Christmas cheer than their global counterparts.

At Stockopedia we’ve covered the results or news of 32 companies, you can catch up on all of our news analysis via this link.

A couple of company highlights from the week for me:

• I have pondered whether I should include Games Workshop (LON:GAW) as a highlight, because it would be the second week in a row, but news of the company’s deal with Amazon this week is a definite win for the week. Roland covered the news on Tuesday.

• I recently spent £40 in one order at Domino's Pizza (LON:DOM)  and endured a difficult wait while the driver struggled to find my house. But I still love it as a consumer. So I am always interested in company numbers. On Tuesday management reported full-year trading in line, with improved growth in Q4, vs H1 and Q3. Roland covered the stock on Monday.

Further afield there have been some eye-catching business headlines. US chocolate company Hershey Co (NYQ:HSY) saw its share price spike after reports that it might be a takeover target for Cadbury’s owner Mondelez International (NSQ:MDLZ). The deal would need to be signed off by the family trust, which still controls 80% of the voting rights at Hershey via its Class B shares. At the moment, takeover talks are only in the early stages and there has been no official bid. But any firm offer might encourage more bidders to come forward. Nestle, for example, has a chocolate division. And Warren Buffett’s Berkshire Hathaway likes the industry.

There’s also been takeover news in the advertising space. Omnicom (NYQ:OMC) has confirmed a $13.5bn takeover of Interpublic of Companies (NYQ:IPG) to create the world’s largest advertising agency. It’s a deal which wouldn’t have been given the light of day only a few years ago, when takeover rules would have likely deemed the combined companies too much of a monopoly. But the world of advertising has changed and agencies don’t hold the same power in the market as they once did. Today, advertising power lies at the feet of Alphabet and Amazon. The Omnicom/IPG deal is likely to trigger more merger speculation in the industry. WPP’s share price has risen this week.

The car market (which I keep looking for time to analyse properly) continues to drum up headlines. This week, General Motors Co (NYQ:GM) has announced it’s pulling out of the robo-taxi market due to an increasingly competitive landscape. The company previously operated self-driving taxis via its Cruise division, but was forced to pull its vehicles off the roads after a fatal accident involving a pedestrian. Now the company says it will change its focus to personal autonomous vehicles and will likely move investment from Cruise into its own AVs.

The Week Ahead: 16-20 December

Onto next week. First up here is Graham’s economic calendar for the upcoming week.

Economic Calendar

Companies Reporting

The following table is a comprehensive overview of companies reporting this week. I have included some stand-out AGMs as it’s such a quiet week. Some of these are interesting smaller companies, so that’s where the focus of my analysis is this week.

Monday: Tristel

Tristel (LON:TSTL) is one of the UK’s great small caps.

Prior to its formation in 1993, the gold standard for disinfecting hospital equipment was a compound called glutarealdehyde. It was known to be toxic, but it was the best option. Then Tristel launched its chlorine dioxide formulation, which has become the new gold standard. Most hospitals in the UK are customers and the company has almost 100% domestic market penetration.

But maximising the market leaves very little room for growth, which is why Tristel has spent most of the last decade expanding its international opportunities. In FY2024, the company generated 61% of its revenues from markets outside of the UK. The company’s two product suites (Tristel and Cache) are now sold in 61 countries.

But while Tristel is already the market leader in the Europe, the Middle East and the Asia Pacific regions, it’s the massive North American market which provides both the opportunity and the threat.

Tristel has attempted to make significant in-roads in the US for many years. But, like many small cap British companies, it has become tangled in the complex regulation, manufacturing environment and bureaucracy.

In 2023, the company gained FDA approval for its foam disinfectant for ultrasound probes and started selling the product in the US for the first time in 2024. But in FY24 results, management said that the company’s manufacturing partner had encountered “more purchasing bureaucracy” than originally expected, which has “slightly extended the timeline for some adopters to come on board”.

And this is the story with Tristel. The promise and expectation of US riches is always present, but it often comes tinged with disappointment.

Still, sales growth remains impressive. Over the last five years, revenues have grown at a compound annual rate of 10%. Gross margins are very high, as the company sells mostly via incredibly sticky licences. Operating margins have averaged 15% in the last five years.

Megan’s view:

I like Tristel, it’s a fabulous company which does a lot for showcasing the potential value of companies on Aim.

But it hasn’t been a great investment of late. Sure, investors have received a nice chunk of cash via dividends, but the share price hasn’t really gone anywhere since 2020. Earnings expectations for the year to June 2025 have tapered off and they have been cut for the following year.

Investors are currently of the mindset that earnings growth of 15% next year, falling to 13% the following year isn’t quite enough to justify the price to earnings ratio of 22x based on the company’s current share price of 395p.

But I am more positive than the market. I think there is a lot of untapped potential in the US, which the new chief executive (who took over from the company's retiring founder in September) might be able to crack. I don’t expect this to be a quick turnaround, but I do think this is a good opportunity for the long term. And as the PE ratio is lower than it’s been for a while, I am rating this one GREEN.

Wednesday: dotDigital

After the shine came off dotDigital (LON:DOTD) in the wake of the pandemic, private investors and then institutions sold out en masse. The company’s share price is 68% off its 2021 highs and though there are still signs of good quality, growth has never quite recovered enough to justify a collective leap back in.

dotDigital is an online marketing platform, which sells its solutions to customers in a wide range of industries primarily via licences. Just under 80% of the company’s revenues come from recurring sources, with a further 14% delivered by customer contracts which are ‘predictably repeating’.

It’s a business model that lends itself to very low sales costs. In 2024, the company spent just £14m on the ongoing management of its tech platform, meaning gross margins were over 90%.

The bulk of company costs are in staff and in 2024, the company spent £27m of its total £47m of operating costs on wages and bonuses. Marketing is also a big chunk of expenditure. Aside from the fact that dotDigital has 266 staff in its sales and marketing team (out of a total 451), it spent £5m on direct marketing and partner commission. Rising staff costs have contributed to a fall in operating margins in the last few years, from 26% in 2019 to 15% in 2024.

There is a conspicuous lack of expenditure on the platform and technology in the company’s income statement, but capital expenditures have leapt up in recent years. In 2024, the company spent £9.9m on capex. Amortisation has climbed from £2m in 2018 (the first year it started capitalising its development costs) to £9m last year.

dotDigital remains cash generative. In 2024, free cash flow was £11.2m, equivalent to 84% of net income. The company returned £3bn to shareholders via dividends and paid down £1m of its very small pile of debt. The net cash position at the year end was £39m, despite an £18m investment in a bolt-on acquisition.

Megan’s view

I can’t get as excited about dotDigital as I once could.

For a start, the company seems to be spending a lot but struggling to add new customers. In 2024, revenues rose by £10m, with about £9m of that delivered by higher average spend per customer. That suggests new customer acquisition is only just higher than churn.

I also preferred it when the company expensed its tech development. It is no longer clear exactly where the company is investing in improving its product and whether that is delivering any value.

Sales growth remains impressive (although in 2024, that was bolstered by acquisitions), but weakening margins means profit growth hasn’t kept pace with the top line. Earnings were hit in 2024 by the cost of the acquisition and are expected to rise again in 2025, but forecast growth isn’t as strong as it was back in dotDigital’s heyday.

The market has its positives and negatives. On the one hand, demand for digital marketing expertise is always on the up, but on the other, companies are feeling the squeeze of rising costs elsewhere and marketing budgets tend to be the first culled.

On the surface, this continues to be a high quality operator in an interesting section of the tech market, but underneath there are a lot of problems which leave me uninspired. AMBER/RED