Interactive Investor

Share Watch: Can these three firms weather Covid-19?

A trio of shares have a bright long-term future if they can make it through the present pandemic, sugg…

9th April 2020 15:39

Richard Beddard from interactive investor

A trio of shares have a bright long-term future if they can make it through the present pandemic, suggests Richard Beddard.

Deciding on the long-term prospects of businesses is a daunting prospect when so much about the short term is uncertain. But a pandemic is just one of numerous ill-defined but serious threats we hope will not happen “on our watch”. Over the course of an investing lifetime, though, some of them inevitably do.

When we buy shares for the long term, we seek well-managed businesses with strong finances that can plausibly adapt to whatever fate throws at them, on the assumption that things will return to something approaching normality. In other words, we rely on the people working at businesses we trust, rather than dodging and weaving in the stock market, to secure our investments for the future.

These are the kind of businesses I try to identify, score and rank.

Howden Joinery

A kitchen supplier may seem like an odd company to invest in for the long term. Fitted kitchens are expensive, and take a long time to wear out. Often we fit new kitchens when we move house and if the housing market is moribund, as it is now, kitchen demand will fall. Needless to say, fitting kitchens in homes full of people isolating themselves is a no-no. Howdens is keeping some depots open, but business must be far from usual at the moment.

But Howdens has found a way to generate repeat business from kitchens, by selling only to local builders who sell and fit the kitchens to the rest of us. By catering exclusively to their needs, Howdens has rolled out depots for the last 25 years and become the dominant supplier to the trade with a 30% share of all UK fitted kitchen sales (trade and retail). The superiority of the business is reflected in high levels of profitability, strong cash flows (despite hefty cash payments to plug its pension deficit) and enough surplus cash on hand to last it through a year of normal trading without recourse to borrowing.

RM

I’m more conflicted about RM, which supplies schools with equipment and IT, and educational and professional exam boards with electronic marking software. With schools shut and examinations cancelled, RM is also in the eye of the storm, and it went into the crisis as one of the more indebted companies I follow. After factoring in the rough value of operating leases and RM’s pension deficit, the company is heavily dependent on external sources of financing.

The debt was created when RM bought Consortium, and merged it with TTS, RM’s more profitable schools supply business, in 2017. Although the company expects synergies as it replaces many warehouses with one automated distribution hub, recently it’s been experiencing the costs of the merger but not the benefits.

However, I think RM has a bright future if it can survive the present. The electronic marking business has been tremendously profitable, and RM now has acquired an electronic testing product to sell with it. Meanwhile, RM’s third business, which supplies school with IT infrastructure, has been quietly growing in profitability.

Tracsis

Tracsis’ most profitable business looks resilient. It supplies the rail industry with specialist software, for example scheduling, and trackside monitoring equipment that increases the efficiency of railways. But it also has a large business focused on road transport. While Tracsis owns unique rail technologies, it is in a less competitive position in regard to services such as traffic surveys and event parking that the other side of the business offers. Owing to the general absence of traffic and the total absence of events at the moment, these activities will be on life-support during the pandemic.

The company as a whole has grown profitably since it was founded. It has surplus cash, no debt, and I expect it to survive and prosper.

Share Sleuth’s favourite five

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ScoreNameDescriptionInteractive Investor link
9.0XP PowerManufactures power adapters for industrial and healthcare equipmenthttp://bit.ly/swXPP2019
8.6VictrexManufactures PEEK, a tough, light and easy-to-manipulate polymerhttp://bit.ly/swVCT2019
8.2DewhurstManufactures pushbuttons and other components for lifts and ATMshttp://bit.ly/swDWHT2020
8.2FW ThorpeMakes light fittings for commercial and public buildings, roads and tunnelshttp://bit.ly/swTFW2019
8.2Howden JoinerySupplies kitchens to small buildersbit.ly/swHWDN2020

Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value. 

This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

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