Five industrial stocks for 2015

Financial journalist and commentator on 3AW and Sky Business
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Key points

  • Auto sales website Carsales has been successful at “disrupting” and overcoming its competitors.
  • IMF Bentham and Nearmap have unique offerings that they are leveraging well.
  • IDT Australia and Select Harvests might be small but they should not be ignored.

 

One large cap and four mid to small caps make up this list of industrial stocks worth watching, and perhaps adding, to your portfolio this year. All are well-managed companies with that special something that could put them ahead of the pack.

Carsales.com (CRZ)

Auto sales website Carsales.com (CRZ) has been a huge success as one of the original internet “business disruptor” stocks on the Australian Securities Exchange (ASX), but the share price was flat over 2014, despite solid (13%) growth in earnings and dividends. That is good news for someone contemplating buying the stock now, because CRZ is well-placed to boost earnings over the next two years, as the company builds out its strategy of not only hosting car transactions, but leveraging its large – and highly engaged – audience to potential advertisers.

Carsales.com (CRZ)

Source: Yahoo!7 Finance, 19 January 2015

In the last few years, Carsales has made a range of excellent investments, at home and abroad. It has moved into boats, motorbike, truck and tyre sales, and bought a controlling stake in Stratton Finance. International investments in Webmotors (Brazil), Skencarsales (South Korea) and iCar Asia (South East Asia) give Carsales long-term growth opportunities outside Australia.

With the core business performing well, buyers can look to tap into the potential upside offered by the newer investments. Although arguably not cheap, at 22.3 times FY15 expected earnings and a 3.6% fully franked dividend yield, the analysts’ consensus target price, at $11.38, implies 11% upside from current levels.

IMF Bentham (IMF)

Litigation funder IMF Bentham (IMF) has a very basic business proposition: it funds legal action in exchange for a share of any judgment or settlement: if the litigant loses, it does not have to repay IMF.

In such a business model, IMF lives and dies on its choice of the cases it funds. On this score, it has built a comforting track record: it has lost only six cases out of 159 funded and completed (104 cases were settled before going to court, 14 were won, and there were 35 withdrawals.)

IMF Bentham (IMF)

Source: Yahoo!7 Finance, 19 January 2015

IMF Bentham is one of three litigation funders that have moved to leading positions in the business, the others being Burford of the US and Harbour of the UK. Each has started funding cases in the others’ original territories: in IMF’s case, it has expanded into the US, the UK and Europe (in joint venture) and Hong Kong, where it mainly does insolvency work.

At home, the company has funded cases against the likes of ABC Learning, Treasury Wine Estates, ANZ Bank and a case relating to the 2011 Brisbane floods. IMF has generated a gross return of $2.73 for every $1 invested, but is targeting a lift in this return to more than $3.00.

At the end of 2014, the value of the company’s case investment portfolio – IMF’s best-estimate of claim value of the 30 cases on hand – stood at $2.07 billion, up 26%. Just over one-third of this portfolio is expected to finalise this financial year. Cashflow is unpredictable, but the net income from litigation funding in FY14 was $25.3 million, and the net profit was $9.9 million. The company paid a fully franked dividend of 10 cents a share.

Nearmap (NEA)

Aerial mapping specialist Nearmap (NEA) has been a strong performer in recent years, but is another stock that has traded mostly sideways in the last 12 months. That does not reflect the progress the company has made in taking its proprietary high-resolution aerial imagery technology to the US market. Nearmap’s clients are municipalities, governments, builders, engineering companies, insurance companies, asset owners, infrastructure operators, utilities, the building and construction, and defence and utility industries: its subscribers get regular image updates online, within hours, and use a range of overlay tools. A regular flying program keeps images updated, at least monthly.

Nearmap (NEA)

Source: Yahoo!7 Finance, 19 January 2015

Nearmap’s US offering now includes all large US cities. The company’s competitive advantage is the high resolution of its aerial images, which offer its customers the ability to zoom-in to great detail, and have instant reference to an archive of previous images. In fact, Nearmap considers itself a data company, not an aerial mapping company.

FY14 saw Nearmap break though for maiden profit, of $7.1 million, on revenue that rose by 62%, to $17.1 million, but it did not pay a dividend. The company says it is capable of making US sales of up to $50 million a year by December 2017. Nearmap has a commercial licence agreement with Google Maps, and it is not out of the question that Google might one day look to buy the company. The analysts that follow Nearmap reckon it can reach 85 cents, which is 32% above current levels.

IDT Australia (IDT)

Contract drug manufacturer IDT Australia (IDT) is only a tiny company, but it signed a very impressive – and potentially transformative – deal last year. In November, IDT announced a deal to buy a portfolio of 23 generic drug products, from an undisclosed global generic drug company, for up to US$18 million ($20.7 million). The company has entered a conditional agreement to acquire the drugs for an initial US$13.5 million: the agreement also stipulates trailing payments of $4.5 million, as it meets a series of regulatory and sales milestones.

IDT Australia (IDT)

Source: Yahoo!7 Finance, 19 January 2015

The product suite includes products, proven on-market, for treating Parkinson’s disease, depression, infections, anti-inflammatory, ADHD, post-surgical clots, hypertension, pain and other conditions. All products are (or have previously been) approved by the US Food & Drug Administration (FDA) as abbreviated new drug applications, which is the approval for an existing licensed medication or approved drug.

For some time, IDT has been talking about its strategy to maximise the value of its globally accredited – but under-used – drug manufacturing plant in Victoria, and to develop a generic (off-patent) drug portfolio in its own right. The deal does this: the plant will see a 40% lift in capacity utilisation, over a five-day week, and because there will be minimal increase in fixed costs, increased volumes should drive very substantial operating leverage for IDT, which should boost revenue, margins and ultimately, profits.

Select Harvests (SHV)

Conditions could hardly be better for vertically integrated almond producer Select Harvests Limited (SHV). The company racked up a record profit of $29 million in 2013-14, up 27% on the underlying profit from 2013, on the back of a 33% increase in the price of almonds. And drought in California – where more than 80% of the world’s almonds are grown – is hurting supply, pointing to rising prices for almonds.

Select Harvests (SHV)

Source: Yahoo!7 Finance, 19 January 2015

It also helps that demand for almonds has escalated in recent years, on the back of rising demand for products such as almond milk, and general appreciation of almonds as a healthy food: almonds have displaced peanuts as the most consumed nut in the US.

Select Harvests owns almond orchards in South Australia, Victoria and New South Wales, and is aiming to double its planted acres by 2018. The company’s consumer brands include Lucky, SunSol and NuVit. It is a single-commodity exposure, but that commodity seems to have strong and improving fundamentals. The analysts that follow Select Harvests reckon it can boost its earnings by 27% this year and lift its dividend (55% franked) by 30%: they also see it trading 22% above its current price.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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