I noticed for the last five years that the Zotefoams capital expenditures (capex) is rising almost 30% per year, far far in excess of the sales or operating income improvements. What is the reason for this?
According to their last annual report, it's ongoing investment in a new plant in Kentucky to ensure that if their Croydon factory is eaten by a giant lizard they'll be able to keep supplying their US customers.
timarr
The investment in Kentucky will increase global block foam production by 20%. I take this to mean global production total, not just ZTF's global production, although I've always been concerned I've got that wrong.
Okay, but some historical perspective is maybe in order.
Earnings per share for 2014 to 2016 and TTM are:
10.7 10.9 13.5 14.8
Capex per share for the same years:
18.4 20.6 28.4 21.5
So capex for four years now has been around twice as high as earnings per share.
At what point do those investments give revenue and earnings increases that offset the multi-year investments?
You're right Pone, and thanks for prompting me to have a good look at it.
The main investment has been Kentucky which was meant to have been operational in the middle of 2017, this has now slipped to Q4. Hopefully this will go off okay now and we'll see some benefit in 2018, although I'm open to the idea that it may take a year for the benefits to really show up. There will be a second autoclave there which can be commissioned for a much smaller expense as and when it's needed.
In general though I think you're right - They've invested a lot of money in the last few years and it needs to start showing up as revenue and profit quite soon to prove it was money well spent.
Interestingly I notice that the figures for ROA, ROCE and ROE haven't fallen as much as you might expect over the last few years given the rise in investment and the much smaller rise in earnings.
ROA, ROE, ROIC, etc all use earnings from the income statement, whereas capex is hidden on the cash flow. You would see the effect of this spending on free cash flow.
The 'R' comes from the income statement but the rest comes from the balance sheet.
The cash spent has clearly turned into increased fixed assets, and you're right: those fixed assets need to start working a bit harder quite soon.
Just for kicks, I took the ZTF TTM earnings per share of 14.8 pence and fed that to a DCF calculator to determine what rate of growth of earnings justifies the current share price. They need to show compound growth of earnings of 19% in order to pay back the share price in earnings.
Is this new plant going to double their size? 19% compound growth is a high bar to set. That's what Amazon delivers.
I'm as sceptical as you that they'll show that sort of sustained growth, but frankly almost all my holdings are arguably overvalued right now. Certainly I'd not be rushing to top any up (possible exception for £SOM) so continue to hold I shall.
