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Portmeirion Group (PMP)
Seven shares for the future
By Richard Beddard | Fri, 19th May 2017 - 15:38
The number of companies recommended by the Decision Engine has shrunk to seven. The share prices of many of the 60 or so companies I follow have shot up, and in some cases my conviction has deteriorated.
Judges is a serial acquirer. It buys up small businesses that manufacture scientific instruments. Generally, it doesn't do anything particularly clever with the companies it buys except profit from their continuing prosperity. Shareholders profit if Judges can identify good companies and buy them cheaply.
Typically it pays between three and six times EBIT, a profit measure, much less than Judges' typical stockmarket value, because the companies it acquires are private and hidden from most investors. If the profit from these companies is sustained, as Judges expects, or better still grows, these are very good investments.
Judging by Judges' long-term record, it's acquired profitable businesses, but in recent years profitability has fallen to more pedestrian levels. If current levels were to be sustained for many more years, I would begin to question whether Judges really does add much value.
So we're faced with the age-old question. Is the decline in profitability temporary, or has something changed? Profitability needs to recover somewhat if Judges is to be a compelling investment.
The long and the short of it
Profitability may well improve immediately, and over the long-run. The latest from Judges is orders are increasing. It explains in its annual report that two of its eight established subsidiaries misfired in 2016 and Armfield, the biggest of five acquisitions made over the last two years, also performed poorly.
While there were specific problems at one company, demand for scientific instruments has also been inconsistent. Judges sells equipment to universities and, since their budgets fluctuate, results in a single year may not be representative of the company's earning power over time.
Judges has been listed since 2003, so it's tempting to assume profitability will revert to the long-term average level. While that assumption could lead us astray, relatively big acquisitions in recent years may have a disproportionate effect on the future, I believe profitability in 2016 is lower than the typical levels Judges will achieve.
Dealing with miscreants
I'm not surprised subsidiaries misbehave from time to time. In my experience most companies do! But a reader raises a valid question. Judges is hands-off, preferring to let subsidiaries keep doing what they do well. That's very reassuring, if the problems are temporary and external, but surely it must intervene when things go wrong within a subsidiary?
The short answer is it does. Judges monitors financial performance centrally. Finance director Brad Ormsby tells me it agrees annual budgets with each subsidiary, monitors performance through regular financial reporting, and advises and challenges managers at board meetings. If it has to, Judges will fire managers, as it has done once in recent months.
Since chief executive David Cicurel owns 15% of the shares, there are shareholders on the boards of the subsidiaries! They are providing a lot more scrutiny than, for example, investment funds do of listed shareholdings.
By coincidence I've been listening to an interview with William Thorndike, a private equity investor in niche businesses and the author of an influential book, 'The Outsiders'. It analyses the careers of eight chief executives who achieved exceptional returns for investors.
There are similarities between the way Thorndike's firm operates and the way Judges does, and also between the way the chief executives he studied managed their businesses and the way Judges manages its subsidiaries.
At one point in the interview Thorndike says all of the companies in the book had highly decentralised organisations tied into a rigorous annual budgeting process with targets enforced and numbers audited.
Not Berkshire Hathaway after all
One of Thorndike's outsiders was renowned investor Warren Buffett, which is relevant because I've previously compared Judges to Berkshire Hathaway, Warren Buffett's investment company. Both companies are hands-off acquirers but there are obvious differences too.
Berkshire Hathaway is one of the US's biggest companies, and it has a sprawling range of interests. One difference in particular bothers me, and that is funding. Berkshire famously invests the float, the unclaimed premiums it has collected from its massive insurance businesses. The float is effectively an interest free loan from customers.
Judges hasn't got a source of free capital like Berkshire. It borrows money to fund acquisitions and its debt has risen above the conservative level I'm comfortable with. While the company is profitable and cash generative that's not a problem, but it adds risk if I'm wrong, and profitability deteriorates further.
Seven for the future
Despite my misgivings about debt, having concluded my review and fed my anxieties into the Decision Engine, Judges scores 7/10. I think it's a good investment at the current share price (£16.80).
It ranks 6, in a much smaller table than last month's. Two things determine whether a share meets the Decision Engine's criteria: price and quality. Prices have been going up (which reduces a share's score), and I've revised my opinion on Next (NXT) and Castings (CGS).
Regarding Next, I'm beginning to wonder whether what I don't know matters more than what I know. It now ranks 6/10 and misses the cut.
Castings faces seemingly enormous challenges. It makes components for heavy vehicles, mainly. I can't fault it in every respect bar one. It's a very straightforward business, with unblemished accounts. It's been highly profitable for a long time. It's proved itself adaptable and resilient to previous challenges. And management are paid fairly (as opposed to excessively).
It's difficult though to look past the possibility that the mostly European manufactured diesel vehicles it makes parts for will eventually go the way of the horse and cart.
The Decision Engine scores it 8/10, but the Decision Engine can only identify strong companies set well for the future, it cannot see the future.
Here are the seven top-ranked companies, with their scores:
Dewhurst (DWHT) manufactures components for lifts, keypads and railway rolling-stock, particularly pushbuttons.
Science (SAG) advises and does research and product development for customers in medical, industrial, consumer and energy industries.
Solid State 
Solid State (SOLI) manufactures and distributes specialist electronic components and computer systems, often used in harsh environments.
Portmeirion (PMP) manufactures tableware. Owns Portmeirion, Spode and Royal Worcester brands as well scented candle maker Wax Lyrical.
Castings manufactures cast iron parts for heavy trucks and cars, components for engines, gearboxes and differentials for example.
Judges Scientific 
Judges Scientific acquires small businesses that manufacture scientific instruments and operates them.
Vp (VP.) rents out specialist equipment and tools to construction, engineering, transport, oil and gas and events businesses, and individuals.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.