Shares for the future: downgrades shrink my list of favourite shares
2nd December 2022 15:45
by Richard Beddard from interactive investor
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After re-scoring some of the 40 stocks he researches, our columnist Richard Beddard has removed six companies from his high conviction list. Find out who remains.
Ever since a reader wrote to me following my article scoring Renishaw earlier this year, I have been wondering about pay there.
Renishaw (LSE:RSW) manufactures tools that automate factories, 3d printing machines, and medical marvels like surgical robots.
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How well does Renishaw pay?
My correspondent is friendly with a long-time employee and "cheerleader" for the company who holds its founder and executive chairman Sir David McMurtry in high regard.
Sir David invented the company's first products, and according to his biographical details in the annual report, still plays an active role in furthering the company's strategy, product development, and engineering know-how.
He is also a majority shareholder and well past retirement age. Recently he and his co-founder put the company up for sale, implying a desire to retire, and demonstrating the future of staff and shareholders is intertwined with this decision.
My correspondent also believes that hitherto the unique culture fostered by Sir David, a charming Gloucestershire location, a pool of brilliant engineers, and the opportunity to work on whiz-bang technology, means Renishaw has not had to pay employees top-whack.
That is quite a competitive advantage, and may go some way to explaining why Renishaw is so profitable.
It also raises the question of whether the company's culture can be sustained when Sir David finally goes.
I like to think that good cultures can be institutionalised and survive leadership transitions*. The fact that Renishaw's youthful chief executive joined the company as a graduate trainee suggests he, along with a very experienced board, may carry the culture forwards.
Perhaps Renishaw's refusal to sell out for now, at least, suggests it believes this too.
But my correspondent points out that Renishaw acknowledged staff were unsettled by the sale process in the annual report, and observes that the company's early recruits are themselves reaching retirement age. He wonders if as the old guard retires, Renishaw is going to have to compete on pay more aggressively.
In the annual report, Renishaw says it is "modernising" pay and rewards, so this scenario is plausible, although the company says it was prompted by a post-pandemic surge in employee turnover, which may be a temporary phenomenon.
The UK median salary is £620 a week according to the Office of National Statistics, which adds up to just over £33,000 a year, although this figure does not include pension contributions.
Because larger UK firms are compelled to report the ratio of chief executive to employee pay, we know Renishaw's median pay. It was £42,246 including benefits in the year to June 2022.
That is 12% higher than the prior year, more than twice the rate of general wage inflation.
By way of comparison, I also looked up pay at Oxford Instruments (LSE:OXIG), another company making cutting edge tools for industry and science (although there is little cross-over between the markets the two companies serve).
In the year to March 2022 median total pay at Oxford Instruments was £43,015, up from £38,532 in the prior year.
That is also an increase of 12%.
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A comparison of just two companies does not tell us much. Pay looks quite low at both considering the relatively glamorous, technical, and specialised nature of their work, and both companies responded quickly to the recruitment scramble as the pandemic abated.
But it has made me curious about the extent to which companies can parlay career opportunities and working conditions for pay, and indeed whether they will continue to be able to.
My starting point will probably be to add to my tiny median pay database.
*Ghosts of founder exits past
It is always unnerving when a founder exits the business, especially when an outsider is recruited to replace them. At two of the companies I follow closely, founding chief executives left after more than 20 years in the driving seat. They are Howden Joinery Group (LSE:HWDN) and Victrex (LSE:VCT).
Matthew Ingle left Howdens and was replaced by Andrew Livingstone from Screwfix in 2018. Howdens sells kitchens to small builders, and if the company's entrepreneurial, customer focused culture has changed since, I have not detected it.
Around the same time, David Hummel retired from Victrex. He was replaced by Jakob Sigurdsson. Although Victrex’s culture of innovation seems to have survived intact, it develops new variants of a high-grade polymer called PEEK, the company is taking much longer than it expected to commercialise these novel products.
The sluggishness can be explained, at least in part, by the fact that the last few years have not been easy in some of Victrex's markets, like aerospace and car manufacturing.
But the company is on its third finance director and second chairman since Mr Siggurdsson took over, and I do wonder whether, through the external and internal turbulence, the culture is being preserved.
Notes and addenda
The Decision Engine is a ranked list of shares. Each share is scored using five factors that contribute to long-term performance: profitability, risks, strategy, fairness and price. Though prices change all the time, the other factors ought to be stable because of the businesses selected, which are generally reliable and trustworthy.
Occasionally, I might change a share’s score mid-term, but I am very reluctant to because the Decision Engine is designed to help me avoid knee-jerk reactions and consider every relevant facet of a share when I score it.
More often, I will harbour doubts until the company next publishes its annual report, an event that triggers me to score it again.
These shares may experience a reduction in score next time around.
Hotel Chocolat Group (LSE:HOTC): Hotel Chocolat has abruptly ditched its international growth strategy, shutting down businesses in the US and Japan. The focus now is on the profitable growth of its UK operations. More focus and lower costs ought to make the company more profitable, but these events have shown there may be limits to the chocolatier's growth potential outside its home country.
Treatt (LSE:TET): The supplier of mostly natural flavours has published its full-year results, which show a rare decline in profit. Although this is probably temporary, a result among other things of its inability to raise prices as fast as costs rose.Â
That, though, is making me ponder the balance of power between Treatt and the much larger multinational beverage companies whose custom it values so highly.
Last month two other companies, Anpario (LSE:ANP) and Marks Electrical Group Ordinary Shares (LSE:MRK), were in this list, but I have changed their scores. You can read why in the Share Sleuth column.
The Decision Engine
Since the previous Decision Engine update, I have re-scored James Halstead (LSE:JHD), Cropper (James) (LSE:CRPR), and Tristel (LSE:TSTL).
All 40 shares in the table are probably good long-term investments, but those ranked nearest the top are the ones I am most confident about - these high-conviction stocks typically score 7 or above. The number has reduced from 27 last time to 21 now. Â
0 | Company | Description | Score |
1 | Supplies kitchens to small builders | 9 | |
2 | Manufactures tableware for restaurants and eateries | 8 | |
3 | Manufactures pushbuttons and other components for lifts and ATMs | 8 | |
4 | Imports and distributes timber and timber products | 8 | |
5 | Manufactures/retails Warhammer models, licenses stories/characters | 8 | |
6 | Casts and machines steel. Processes minerals for casting jewellery, tyres | 8 | |
7 | Retails clothes and homewares | 8 | |
8 | Translates documents and localises software and content for businesses | 8 | |
9 | Sources, processes and develops flavours esp. for soft drinks | 7 | |
10 | Designs recording equipment, loudspeakers, and instruments for musicians | 7 | |
11 | Whiz bang manufacturer of automated machine tools and robots | 7 | |
12 | Manufactures sports watches and instrumentation | 7 | |
13 | Manufactures filters and filtration systems for fluids and molten metals | 7 | |
14 | Manufactures power adapters for industrial and healthcare equipment | 7 | |
15 | Manufactures military technology, does research and consultancy | 7 | |
16 | Manufactures natural animal feed additives | 7 | |
17 | Makes light fittings for commercial and public buildings, roads, and tunnels | 7 | |
18 | Distributor of protective packaging | 7 | |
19 | Manufactures PEEK, a tough, light and easy to manipulate polymer | 7 | |
20 | Manufactures connectivity components and power cord | 7 | |
21 | Acquires and operates small scientific instrument manufacturers | 7 | |
22 | Chocolate maker and retailer | 6 | |
23 | Manufacturer of scientific equipment for industry and academia | 6 | |
24 | Manufactures personal care and beauty brands | 6 | |
25 | Sells promotional materials like branded mugs and tee shirts direct | 6 | |
26 | Sells hardware and software to businesses and the public sector | 6 | |
27 | Online retailer of domestic appliances and TVs | 6 | |
28 | Manufactures surgical adhesives, sutures, fixation devices and dressings | 6 | |
29 | Manufactures specialist paper, packaging and high-tech materials | 6 | |
30 | Distributes essential everyday items consumed by organisations | 6 | |
31 | Operates tenpin bowling and indoor crazy golf centres | 6 | |
32 | Publishes books, and digital collections for academics and professionals | 6 | |
33 | Manufactures vinyl flooring for commercial and public spaces | 6 | |
34 | Develops and integrates Customer Data Platforms | 6 | |
35 | Supplies vehicle tracking systems to small fleets and insurers | 6 | |
36 | Manufactures disinfectants for simple medical instruments and surfaces | 6 | |
37 | Manuf's rugged computers, battery packs, radios. Distributes electronics | 5 | |
38 | Supplies software and services to the transport industry | 5 | |
39 | Supplies schools with equipment and IT, and exam boards with e-marking | 5 | |
40 | Flies holidaymakers to Europe, sells package holidays | 4 |
Scores and stats: Richard Beddard. Data: SharePad and annual reports
Shares marked with an asterisk* are more speculative. They score less than 5 out of 6 for profitability, risks and strategy
Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price)
Richard Beddard is a freelance contributor and not a direct employee of interactive investor.
Richard owns shares in many of the shares in the Decision Engine, including most of the top 30.
For more information about Richard’s scoring and ranking system (the Decision Engine) and the Share Sleuth portfolio powered by this research, please read the FAQ.
Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard
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