Midas Extra share tips: Ricardo Group, AssetCo
There is no doubt that the stockmarket is in a better place than it was three months ago. But brokers are beginning to question whether prices have come up too far too fast.
Optimists have assumed a swift recovery in the economy and bought stocks accordingly. Yet many companies are still struggling and data coming from the UK, the rest of Europe and the US paints a mixed picture. All in all, this is not an easy time for investors.
Ricardo Group
Epic: RCDO
Looking beyond the next few months however, some stocks have extremely attractive characteristics. Ricardo is a classic example of this breed. Known primarily as a consultancy for the automotive industry, the company has suffered over the past year. Its share price has sunk from over 365p in spring 2008 to just 201p today. Other automotive-focused businesses have tumbled even further but Ricardo has several distinct advantages that separate it from the rest of the pack.
First and foremost, chief executive Dave Shemmans is a prescient man, who realised some years ago that over-reliance on one industry left the company in a vulnerable position, particularly when that one industry was involved in automotive manufacture and distribution. Cars are an essential item for most of the developed world - and an aspirational item for many consumers in emerging markets - but the industry is prone to cyclicality, which means sales tend to fall off a cliff when times are tough.
Shemmans realised that the engineering expertise Ricardo had acquired could be applied to renewable energy - the techniques for gearbox construction, for example, are similar to those used for wind turbines. He also began marketing Ricardo's talents to the defence industry, which tends to be a lot less exposed to the economic trade winds.
The result of this work has been dramatic. Ricardo used to derive 80% of its earnings from car companies. That has dropped to 50%. The company has moved into other, related areas too, such as motorcycles, heavy trucks, trains and even ships.
Ricardo's year end is 30 June and last month, the group delivered a trading statement, which was rather depressing in tone. The company admitted that some of its customers postponed or even cancelled projects earlier this year and it was unsure whether annual earnings would be the same as last year or slightly below. Shemmans has been cutting costs - and staff - but analysts are pencilling in a fall in 2009 profits before tax from £14.7 million to about £12.5 million. They are still confident about the dividend though, expecting it to rise from 10.6p to 11p.
The downbeat statement may have reflected management views of the first few months of this year but it does not take future prospects into consideration at all. These are a lot more exciting.
Ricardo is a known leader in engineering consultancy and is extremely well-placed to benefit from the ongoing and growing interest in 'green' energy. It is already working closely with several big operators in this area and expects to derive increasing revenues from the sector.
In addition, Ricardo should do incredibly well from legislation being enacted across the world to make cars more environmentally-friendly. Japan is doing particularly well in this regard. Europe has been on the case for a while but most of its automotive companies are behind the curve and need to get moving. But America offers most potential. Its carmakers are on their knees but President Obama is determined to force them to make more energy-efficient cars. Ricardo's advice has already been sought on this and it should win significant amounts of work in this sphere over the coming years.
Midas verdict: At 201p, Ricardo shares offer significant long-term potential. The next few months could be difficult for the company but by this time next year, it should be in a much better position. Buy now and wait for improvements, taking comfort in the 5.4% yield along the way.
AssetCo
Epic: ASTO
Midas Extra recommended AssetCo in the middle of May, when the shares were 42p. Today they are 67p, a rise of nearly 60% in just five weeks.
The company provides vehicles, equipment and support for the police, ambulance and fire services. It owns the entire London Fire Brigade fleet, which includes 500 fire vehicles and 50,000 pieces of equipment. AssetCo also provides the fleet and equipment for Lincoln's Fire Brigade and more contracts are expected from other UK local authorities over time.
The company yesterday published results for the year to end March, showing a 25% increase in pre-tax profits to £11.3 million and a 25% increase in the dividend to 1.25p. These figures were better than even supportive brokers expected, driven by organic business growth and a more efficient approach to costs.
Chairman Tim Wightman is optimistic about the future. The UK has 58 fire authorities and previously, the company thought it would win most business by taking on contracts to supply all the equipment and services for a number of these authorities. Now, it realises many authorities are extremely conservative in their approach and, even though the cost benefits are enormous, it could take them years to make such a decision. In the meantime, they are much more open to using AssetCo on a piecemeal basis, taking on some of the company's products rather than all of them. This may not be as dramatic as a complete outsourcing but it is likely to mean that AssetCo's revenues rise steadily over the next few years. The company is also expanding overseas, building a particularly robust presence in Abu Dhabi .
Brokers fought shy of this company until recently, because in the past it has promised more than it delivered. Now it has changed tack, providing the market with more than expected, not less.
Midas verdict: AssetCo has clear, long-term potential. Its customers provide an essential service and they trust this company to provide them with what they need. Over time, its reputation should help AssetCo to expand in Britain and abroad, so the shares should do well. In the meantime though, a 60% price rise in a few weeks is hard to resist. Sell at least a quarter and keep the rest.
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