The Week Ahead: 2-6 December (OMG, FRAS, TET)

Good afternoon and welcome to the Week Ahead.

After a successful trial run of this concept back in the summer, we have decided to bring it back on a Friday to give you the whole weekend to digest and prepare for the upcoming week in the markets.

We also thought it might be a useful home for all your weekend discussion about stocks and market news. Do get in touch via the comments to let us know any companies that you are especially interested in or that you would like us to take a closer look at.

The week in review

First up, a quick re-cap of what you might have missed in the week just gone.

The FTSE is looking to close the week pretty much flat. At the time of writing it is up 0.18%. The US is heading towards a +1% close and European indices are down 0.4%. The Nikkei has closed 1.5% down.

At Stockopedia we’ve covered the results or news of 28 companies. You can read back over all of our analysis via this link.

There has been a real flurry of interim reports this week with mixed fortunes. A couple of highlights for me:

• Cranswick (LON:CWK) - the UK’s biggest pig breeder continued to live up to its expectations as an impressive compounder. For investors looking for reliably growing companies which can deliver over the long-term, this is an interesting option.

• Benchmark Holdings (LON:BMK) - which managed to sell its genetics division for £260m. Equivalent to what the entire market cap of the company was prior to the announcement of the acquisition. The company is going to get all that cash from the transaction, but the market cap is still only £288m. Surely it is worth more now?

Over in the US, the business news remains hinged on the latest updates from president-elect Donald Trump who this week appointed ex-hedge fund manager Scott Bessent as his Treasury Secretary. It’s a move that has been seen as generally positive for global markets. Mr Bessent seems like a moderate choice and someone who is unlikely to force through massive trade tariffs. Although Trump did also confirm this week that tariffs might be ready to hit China, Canada and Mexico on day one of his presidency.

The bond market took the news of Bessent’s appointment well, with Treasury yields falling slightly from recent highs. Still, inflation concerns continue to weigh on the US, which is forcing bond prices down. Perhaps a time to consider some more commodity exposure in your portfolio? This week Mark showed us how we could gain an edge when investing in commodity stocks. If you haven’t read his article, check it out here.

Elsewhere in the bond market, yields of French bonds briefly overtook those of Greece this week amid concerns of the impending budget. The ten year yield rose to 3.022% on Thursday.

The Week Ahead: 2-6 December

Onto next week and what we can expect from companies and the markets.

Monday will see the first full day of trading in the US following the Thanksgiving period. Retail and spending data will be closely watched following Black Friday and Cyber Monday.I am especially interested in UK retailers, with a handful set to report next week (see below).

The automobile market is also likely to remain in the spotlight after a week in which the UK’s electric vehicle targets came under pressure from two car manufacturers, Stellantis and Ford. Both companies have said that the sales targets set out for EVs would be difficult without more incentives for consumers to buy non-petrol guzzling cars.

Companies Reporting

The following table is a comprehensive overview of companies reporting this week. Below we go into more detail on some of the stocks that we’ll be most interested in and how we’ll be looking to spend our week in investing.

Monday: Black Friday consumer data

I’ll be looking out for any signs of a good or bad selling period, which will likely have implications for many retailers - some of which are set to report later in the week.

Tuesday: Oxford Metrics

Oxford Metrics (LON:OMG) has been a consistent deliverer of expectation-beating earnings in recent years (see table). So it may have been particularly surprising for shareholders in September when the company announced its FY2024 financial results would be below expectations.

The subsequent collapse in forecasts was mirrored in the major share price sell off.

Oxford Metrics specialises in motion capture sensors and software with applications across many industries: life sciences, entertainment, engineering and virtual reality. For those who want a hint of the company’s prowess in tech, I would recommend visiting their website - it is pretty spectacular.

Revenues have historically come in surges across the different operating divisions. For example, entertainment delivered 43% of total orders in the 2023 financial year and reported an 82% increase in sales, owing to buoyant demand in the Asia Pacific film-making industry.

This financial year that demand has tempered somewhat, sending entertainment revenues down, while regulatory approval in the medical division has caused a spike in life sciences. In the first half, both divisions contributed around £8.5m of revenue, together contributing 70% of the top line.

It’s a wide mix of industries, which helps to balance out the surges at the top and bottom line (to an extent). But growth isn’t especially spectacular, which seems like a shame when this is a profitable company sitting on piles of cash and operating in industries which are growing quickly. Why isn’t it able to grow faster?

Key Cash Metrics

A couple of notes on these cash metrics. The first is the positive - recently Oxford Metrics has started spending more on capital expenditure than on depreciation, which means it is investing for the long term. The second is more negative - if the company claims to be pursuing an acquisition strategy, it seems strange that its acquisition expenditure has been so moderate, especially considering the company is not short of cash.

The company’s reported net cash position at the half year point included £10.8m of cash and £44m of fixed term deposits. At the time of writing, that is equivalent to 64% of the company’s market capitalisation.

If you add in the £17m of inventories and trade receivables, Oxford Metric’s current assets are equivalent to 84% of the market cap - which is approaching deep value territory. (Although it is worth noting the company also has just over £10m of current liabilities on its balance sheet as well).

Megan’s view

It is a shame to me that a company which really should be a high growth opportunity is currently bordering on a deep value play. Is this a sad reflection of the state of the UK markets? Or a case of poor management? Probably a bit of both.

As a long-term growth investor, I am going to want to see more of a genuine recovery in these shares before I am tempted. For exposure to the motion sensor software industry, there are plenty of opportunities in the US. These include Cognex (NSQ:CGNX) (I hold), which has been a woeful performer for me personally, but continues to look like an interesting long term opportunity.

For value investors, Oxford Metrics (LON:OMG) might be worth a look. At this level it’s surely caught the attention of some acquirers, if nothing else.

Wednesday: Treatt

Ingredient manufacturer Treatt (LON:TET) last gave us a trading update in October when management said the performance was in line with expectations. Consensus expectations have been pretty consistent at around 24p throughout 2024, which gives a forecast PE ratio of 17x at current levels.

This is a company that has historically seen quite big surges in its PE rating as the share price has grown ahead of earnings.

After the last update there were a couple of key points that our readers were interested in:

1. Inventories. There has been an uptick in the value of inventories in the last couple of years, mainly owing to the increase in the value of finished goods that Treatt is carrying - a symptom of industry destocking.

2. Debt reduction. Fell almost to zero at the year end thanks to robust cash generation.

There shouldn’t be any surprises on Wednesday given the comprehensive trading update in October. But I will be looking out for comments on current trading. An uptick in demand could make the current valuation pretty appealing.

Thursday: Frasers

After a turbulent, but generally upward trajectory in recent years Frasers (LON:FRAS) shares have come off the boil in 2024.

That might be partly due to a general fear about the recent changes to minimum wage and national insurance contributions. Frasers employs over 32,000 people, most of them in the UK and many of them likely to fall in the bracket of NI contribution for the first time. In the year to April 2024 the company spent £696m on staff - just over a third of its total SG&A costs.

The share price sell-off might also be the fault of the company’s increasingly fractious takeover attempts. In the last few months it has entered into very public arguments with both Mulberry and Boohoo as it attempts to squeeze more value out of the two companies. At the end of the financial year Frasers owned 36.9% of Mulberry and 22.7% of Boohoo.

But it is hard to argue at current prices that the company is not looking decent value. Shares are trading on just 7 times forecast earnings, which is low even for a narrow margin retailer. And Fraser’s margins have been ticking up at the operating level in the last few years.

Additional employee costs won’t cause much of an impact in the current financial year (which runs to the end of April and therefore will only include one month of higher NI contributions), but it could impact forecasts for FY2026.

But there is a lot of value hidden in Frasers beyond its operating performance. At the year-end the company was sitting on a property portfolio worth £1.85bn, made up of freehold, leasehold and right of use assets. It also had £495m of investments in other companies. In addition to its Boohoo and Mulberry stakes, the company owns substantial chunks of AO World, Asos, Currys, N Brown and Hornby.

Together the value of these properties and investment companies is equivalent to 70% of Frasers’ current market capitalisation.

Megan’s view

Frasers is a controversial company and a contrarian stock. Buying down would be going against current momentum, which can be risky. But for long term investors, I think this is worth a closer look.

Current chief executive Michael Murray and his father-in-law Mike Ashley divide opinion. But they’re good businessmen and, as CEOs, neither of them have taken a salary from the company for the last eight years.

Friday: The Week Ahead

There is nothing that is leaping out at me on Friday so I will turn my attention back to this report - reviewing the week just gone and having a look ahead to the second week in December, when the countdown to Christmas really will be on.

I hope you all have a lovely weekend.