"the one constant has been, relatively speaking, very healthy FCF generation."
Employees of Carillion believed the profit/margin numbers had somehow been overestimated to hit targets. Pehaps the market is thinking this is the case with Capita?
I sold some Capita in anticipation of this fall after the Carillion news sent Capita shares up briefly. Not bought the shares back in but could do at any point.
"Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base" https://www.investopedia.com/terms/f/freecashflow.asp
"I understand challenges to company come in the form disruptive technologies like in America, but also increased costs due to complex unreliable electric and hybrid cars. On the positives it is a wonderful trusted brand with a great cash flow. "
Thanks JDS - yes Kolwezimundele, AA is an equity valuation "growth" (ie. recovery) story, not one of growth in the underlying business - albeit, as JDS suggests, the latter is a relatively stable, resilient business with a well-invested competitive position and wonderful cash flow characteristics.
As such, it is very much a "special situation" - and has to be viewed as speculative. Ultimately, the opportunity lies in the disconnect between how the equity market is currently valuing the entity and the debt market's view... of course, no guarantee that it isn't the equity market which is right here, ultimately, though more often than not it does tend to be the other way round.
Similarities with Capita, since we are here... also a free cash flow story IMHO. Throughout all the turmoil - management upheaval, accounting concerns and then change, both balance sheet and business structure over-bloated by several years of too many acquisitions (for too much money) - the one constant has been, relatively speaking, very healthy FCF generation.
And now we have Carillion - hardly a shock that the market is shaken by it, and that CPI gets another smacking. But it is a different animal, and ultimately I expect its resurgence - whether this year or later - to be driven by this FCF quality, which may also yet save a dividend which the market now seems resigned to losing (though it is always a choice, and it is one which new management may well make).
A theory - Im a pension Fund I have a decent holding in ABC I want some more, but not at this price. I lend my holding to XYZ until date W I know XYZ is going to short ABC. ABC duly falls then before XYZ is due to return my stock I buy some more ABC at the lower price. Result a Saving in the new holding plus the fee for lending. Im in ABC for the long haul.
Maybe over simplified but Im sure it happens.
Bill has made it clear multiple times that the growth can be done by paying off the debt to more reasonable level that will in return leave more cash for dividends and a valuation closer to what was seen after IPO of over 5+ pounds. Possible fund raising to get rid of remaining debt before then would knock this valuation down somewhat but really looking post brexit.
I understand challenges to company come in the form disruptive technologies like in America, but also increased costs due to complex unreliable electric and hybrid cars. On the positives it is a wonderful trusted brand with a great cash flow.
I agree. I dont understand why pension funds lend stocks for a fee to see it destroyed and have the value of the stock go down or at worst liquidated. cannot be good for pension fund returns. I hold Capita and hope it is strong enough to survive and will see a rebound when some good news comes out and the shorters have to settle up.
As foreshadowed on all relevant boards... 2018 trading from tomorrow, so time to repeat last year's "virtual portfolio" challenge. Same rules, as per the papers - equal weighted, valid for the whole year with no switching, full owning-up at year end!
Marks & Spencer
I retain a bias toward UK exposure and 'Value' (the two closely related, obviously), with an expectation that the UK domestic outlook will clarify satisfactorily (if not wonderfully) this year. But it's no slam-dunk... and so hedged with a decent slug of overseas earnings and a general focus on "stock specific" stories - with LLOY the only real pure play on 'UK PLC' and associated sentiment. Ultimately, well aware that it's near-impossible to avoid losers as well as winners, I have asked the question - can I see 15% over 2018 (plus divis)? Without necessarily much help from the wider market.
Four stocks stay in from 2017, with CPI, IMB, ITV and SGC still to justify their original inclusion and getting another chance (SGC was a close call). Bonmarche has done its job as "speculative" midcap retail play; VOD still looks fine to me but harder to see sufficient upside in either valuation or financial reporting; CARD and WTB were tougher choices, both still good for the long term IMHO but I see their respective attractions now more finely balanced against likely persisting near-term headwinds.
I will doubtless be elaborating on the case for each of the "new" inclusions in the course of the year. FWIW stocks actively considered but failing to make the cut (as well as CARD and WTB): Braemar and SBRY (from my 2017 Top 10), then Aviva, BT, Debenhams, Gattaca, Merlin, Morrisons, Trinity Mirror.
FYI I own 7 of the 10 stocks, with all of CPI (still!), WPP, GSK under active consideration (probably in that order). I'd be surprised if I didn't buy into at least one in the course of 2018.
That's it for 2017, in market hours anyway, so it is time to tot up the final results for my previously published 2017 Top Ten...
Q1 was not bad (in the end)... Q2 better, outperforming decently... Q3 not so much, a bit of a struggle throughout... and now a reasonable (if selective) Santa rally has delivered (belatedly) a decent enough Q4. It all means a positive absolute return for the year (+1.6%), albeit another good quarter for wider markets means I have underperformed the FTSE 100 by nearly 6% (and around 7% vs FTSE All-Share).
But it's not the full story - I went heavy on income plays, with dividends (including a couple of "specials") delivering a further 5.7%, around 50% more than the UK market yield. So I can point to a total portfolio return of 7.3% for the year - still below the 12% or so returned by the main UK indices, but somewhat nearer respectability - and preserving my status as (distinctly) average fund manager... making you some kind of return on your money, but not actually managing to beat, or even meet, an index.
Star performer, after a pleasing (albeit slightly suspicious) late run, was one of my small-cap speculatives, Bonmarche - up 60% for 2017! Then, at the other end of the size scale, comes Vodafone, an 18% return reflecting a year of solid success... just ahead of Card Factory (up nearly 17% after a rollercoaster ride), although CARD just edges out VOD in total return terms (+26% vs +24%). After that, a good Q4 sees Whitbread end the year up 6%, after 'promising' something much worse for most of it.
But that's it for gains, and 4 "winners" out of 10 doesn't really cut it, I concede. Both Sainsbury and Braemar ended near enough where they started (down just under 3%), but thereafter the disappointments pile up like roadkill... Imperial Brands falling 11%, ITV losing 20%, Stagecoach giving up 24% and Capita's year of woe and warnings means it brings up the rear, some 25% down - with some small solace that it's the only one I still don't own for real (but watch this space!)
How to rationalise this performance picture? Well, looking back at my original post, it seems I predicted it up-front a year ago - I quote... "a vague attempt at balance and diversification across the list, though it's probably still a bit too exposed to the UK economy - and hence any further Brexit downturn. Probably inevitable, given my usual bias towards 'value' and aversion to buying into momentum."
The hope was that the Brexit 'deal', and consequent UK economic outlook, would clarify - while there's finally some sign of that now, for most of the year it's remained mired in the mud of uncertainty and ungentlemanly exchange. There is the (related) theme of Value staying out of favour - albeit with 'green shoots' starting to appear just as the snow comes tumbling - and getting ever cheaper over the year as the market found reassurance in "reassuringly expensive" havens of Quality and Momentum.
So what for 2018? "Double-down" on the combo of cheap UK and underappreciated Value, in the expectation (or 'hope'?) that "this time NEXT year, Rodney".... or capitulate and jump on the market bandwagon, trusting the wheels stay on for another 12 months? Anyone following my thoughts for any length of time will know the answer ... but either way, all will be formally revealed in due course with my Top Ten for 2018 - as I always promised, and likewise enourage others to participate.
FWIW my 'real' portfolio fared better for 2017, up c.11.5% (total return c.15%). Nicely outperforming the FTSE 100 (+7.6%) and All-Share (+9.0%) in both price terms and their total returns of c.12-13%, though lagging the Global Market return of 20%. Given I've owned 9 of my "Top 10" stocks for most of 2017 and I didn't set out to pick bad stocks, you can deduce much of my performance came from unexpected quarters... a good advert for diversification - of one's own thought processes and investment instincts, not just of sectors and stocks
Political paralysis in the UK is the big problem surely. It is only going to get worse in 2018. It manifests itself in the rapidly deteriorating pipeline.
And Capita has a history of optimistic forecasting that it doesn't deliver. I would bet that there is zero impact baked in for a potential Corbyn government as well.
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Capita shares dropped on Thursday, extending their 2017 fall as investors eyed a decline in the contractors bidding pipeline as well as several one-off items that it disclosed in a trading update.
The groups shares were down 13.6 per cent in early trading in London, bringing the year-to-date decline to almost 25 per cent, according to Reuters data.
Capita said in a pre-close trading update that it is still expecting a rise in underlying profits in the second half of this year. But analysts homed in on some signs of weakness next year.
at first glance it looks as if there could be some pressures to [full year 2018] profitability, said Caroline de La Soujeole, an analyst with Stifel Nicolaus.
Ms de La Soujeole pointed out that Capitas pipeline of bidding for future work had fallen to £2.5bn from £3.1bn reported in September. Further, the company is warning of higher than anticipated contract and volume attrition in its private sector partnership division which could impact 2018, she said.
Ms de La Soujeole added:
There is also a slew of exceptional costs (restructuring charges and impairments) to factor in. Leverage is expected to be slightly higher than previously flagged.
I just bought 1 tranch of shares at 474p for the SIPP not really wanting to have to average down but mindful that Brexit blood is on the streets. IMO hard or soft outcome is irrelevant in the longer run as these companies always find a way to do business.
Now holding some of the biggest value fallers in the FTSE apart from ITV that was tempting on P/E level but will continue to follow after this current bear period.
I have also been wondering how City of London Investment Trust plc (LON:CTY) has managed to stay so steady during this week and not at all like my large-cap portfolio, and then I realised my stock performance mirror Woodford Patient Capital Trust PLC. If bullishness in commodities are done with (and Brexit fears factored in) I hope 2018 will be the year of value stocks.
"This is an odd stock.... I bought in on fundamentals re-affirmed by Bill at the time and sold for profit but if there are going to be more profit warnings I retain that I need a 7% dividend before I buy back in as dividend cover may have to be looked at again... the recent drop could just be market specific... hard brexit or whatever. "
JDS - yes, still watching this one. I think we always said the period of uncertainty, and potential sustained recovery, would be protracted - and the negative newsflow has continued, as was always likely. But while a lot of this has been negative for the near-term earnings outlook, how much of it has materially changed the underlying cash flow profile? This remains key IMHO.
Down here, the FCF yield (last FY actual) is up to near-15%! You don't see that very often, or indeed, for very long - something has to give, one way or another. I am sure FCF will be lower this year, and possibly for a while, but by how much? My guess is it will still look very enticing, however much actual reported earnings are crushed by accounting changes, etc...
I actually think much of this renewed weakness is more market-driven, as you suggest... anything at all materially exposed to UK plc is being widely, indeed increasingly shunned, no matter how cheap it's getting (witness, for example, ITV).
"At this price the yield is up to 6.3% based on this years earnings which i think is not too bad at all..."
At 485p, the current dividend yields over 6.5%... as above, we will probably see dividend cover - on reported earnings - decimated this year, but on a FCF basis, cover was 2.2x last FY. FCF could fall 40% and cover would still be no worse than the UK market average....
The new CEO could easily cut the dividend... because he can. But I maintain that, unless something more material has changed under the bonnet, there is little NEED to do so, given the cash generation profile and the stronger balance sheet post-disposals.
Whether this is more market driven or still more about Capita under a cloud, I don't see this running back up - and staying back up - any time soon. But on a medium term view, definitely very interesting down here...
I bought in on fundamentals re-affirmed by Bill at the time and sold for profit but if there are going to be more profit warnings I retain that I need a 7% dividend before I buy back in as dividend cover may have to be looked at again.
The market is down and I am suffering with my gains lost in my large caps such as AA, WPP so the recent drop could just be market specific... hard brexit or whatever.
Well done to Exane BNP Paribas who predicted 530p on 12/07/2017 but I do feel this is undervalued but also unloved (right so! IMHO). I am sure there is money to be had but I would want it the share price on a 7% divi before I buy in again.
Peel Hunt 662p.
Deutsche Bank 580p
"So in the short term, around 580p still looks enough for me: 5.5% divi yield, c.10x prospective EPS (if the company's assessment is correct), c.9x EV/EBITDA...
...So I also retain my 635p 'fair value' assessment, based on a 5.0% yield - on a dividend I still think safe, given the FCF profile, from both any further write-downs and the new CEO's possible kitchen-sinking (but you never know - a dividend is always a choice rather than an economic inevitability). But equally it's unlikely to grow much for a while as cover is rebuilt."
No i wasn't looking at FIB just the previous level where it had a major rally from.
Now you mention FIB i had a look at the points from the 431p low to the 721p high i get next support at the 76.4% at 499p but it does not appear to be finding any support or resistance at the respective levels.
So i have no idea really but i just bought a few more today at 518p
The div at 5.5% is pretty good so happy to keep filling my boots.
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