Shares for the future: ranked for the first time

by Richard Beddard from interactive investor |

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Our companies analyst has been busy researching new companies and re-scoring old favourites.

March seems like a very long time ago. The Covid-19 pandemic had only just been declared when I decided Tracsis (LSE:TRCS) was my kind of company. I didn’t score it then because I was not ready to. The pandemic was playing with my mind, and I had only just got to know the business. 

In June, I edged a bit closer to commitment after examining seven years of Tracsis. Today, I’m scoring it, and shuffling it into the Decision Engine, so we can see how it ranks compared to all the other shares I follow closely.

Scoring Tracsis

Tracsis is a collection of businesses. The original one, founded in 2004 and floated in 2007,  developed and marketed crew-scheduling software. It was the seed of Tracsis’ Rail division.

The Rail division has diversified through acquisition. It is the most profitable of Tracsis’ two divisions and is also proving to be its most resilient, thanks to recurring software revenue and large multi-year projects. Despite the pandemic, in May Tracsis reported it had won two new big contracts, one for the TRACS Enterprise suite, which brings many of the division’s software products together, and another for Remote Condition Monitoring systems, trackside systems that monitor the condition of railway track and predict failure. Earlier this month the company reported that it is trading well and has good prospects.

Tracsis’ second division, Traffic and Data Services earned more revenue in the year to July 2019 than Rail, but less profit. In the year about to conclude, it may well earn less revenue than Rail and will certainly earn far less profit. Also largely a collection of acquisitions, Traffic and Data Services’ two most significant activities were hit badly by the pandemic. There was less demand for traffic surveys because there were abnormally low levels of traffic on our roads so the data would not have been very useful. Event traffic management dried up because there were no events and therefore no parking or admissions to sort out.

The company reports in November and says revenue will be about £46 million, maybe 7% lower than 2019. Given that Rail is more profitable and doing well, and a combination of corporate cost management and government support will have limited the damage at Traffic and Data Services, we can hope for a reasonably resilient outcome. 

Looking ahead, traffic has returned to our roads, but events have yet to return to our calendars. Event management was responsible for about 20% of Tracsis’ revenue in 2019, and it remains to be seen how the company adapts to the new normal. A profitable rail division and hefty cash surplus (£16 million in July) give it time.

Tracsis’ historical numbers are very good. 

The company has grown through innovation, acquisition, and international expansion. It buys successful niche businesses and retains the managers, augmenting its own products and services and selling acquired ones more widely. Judging by its 17% return on total invested capital, the strategy is successful. Notably, it has largely funded acquisitions with its own cash flows.

While the Rail division appears to have a number of competitive advantages, principally its intellectual property and the recurring revenues it generates, the Traffic and Data services side is more mundane and customers’ ad-hoc demand has been exposed during the pandemic. Even here though, there seems to be opportunities to add more automation. 

Currently the company is touting artificial intelligence and analytics for measuring social distancing on streets and platforms. It is hoping councils will use them to plan road changes and encourage pedestrians and cyclists.

Tracsis uses artificial intelligence to measure social distancing. Source: https://tracsistraffic.com

I like Tracsis, this is how much...

Profitability: Does the business make good money? [2]

+    Return on capital is very high
+    Profit margins are high
+    Cash conversion is very good

Risks: What could stop it growing profitably? [2]

+    Very strong finances
?    Large customers (biggest 18%)
?    Traffic and Data is less special than Rail

Strategy: How does its strategy address the risks? [2]
+    Using technology in Traffic & Data
+    Specialised acquisitions add value
?    Overseas expansion has been slow

Fairness: Will we all benefit? [2]

+    “Relaxed” culture
+    Executive remuneration reasonable and straightforward
?    Founder only involved as as adviser

Valuation: Are the shares cheap? [-1]

?    595p values the enterprise at £155m, 21 times adjusted 2019 profit
?    But 2019 was a good year
˗    Normalised PE is about 32

I am still getting to know Tracsis. It scores 7/10 and I think it probably is a good long-term investment. It is ranked 19 out of the 34 shares I follow most closely (see below).

Shares for the future

By scoring companies I hope to identify shares that will make good long-term investments even though they may not be performing so well in the short-term. 

The Decision Engine ranks all the shares I follow closely according to their scores. Shares near the top of the list are the most attractive but I would not bother following any of these shares if I did not think they were likely to be good long-term investments.

As well as scoring Tracisis for the first time, I have added another new company, D4t4 (LSE:D4T4), to the Decision Engine since last month’s update and re-scored Castings (LSE:CGS) and Solid State (LSE:SOLI) after they recently published annual reports.

You can see how I scored each share by following the links in the table below:

Name Description Profile
4imprint (LSE:FOUR) Sells promotional materials like   branded mugs and tee shirts direct https://bit.ly/swFOUR2020
Anpario (LSE:ANP) Manufactures natural animal feed   additives https://bit.ly/swANP2020
Avon Rubber (LSE:AVON) Manufactures respiratory   protection and milking equipment https://bit.ly/swBMY2020
Bloomsbury Publishing (LSE:BMY) Publishes books and online   resources for academics and professionals http://bit.ly/swBMY2019
Castings (LSE:CGS) Casts and machines parts for vans   and trucks, primarily https://bit.ly/swCGS2020
Churchill China (LSE:CHH) Manufactures tableware for   restaurants and eateries https://bit.ly/swCHH2020
Cohort (LSE:CHRT) Manufactures military tech. Does   research and consultancy http://bit.ly/swCHRT2019
D4t4 (LSE:D4T4) Developer and integrator of   Customer Data Platforms https://bit.ly/swD4T42020
Dart (LSE:DTG) Flies holidaymakers to Europe.   Trucks fruit and veg around the UK http://bit.ly/swDTG2019
Dewhurst (DWHT) Manufactures pushbuttons and other   components for lifts and ATMs http://bit.ly/swDWHT2020
dotDigital (LSE:DOTD) Developer of marketing automation   software http://bit.ly/swDOTD2019
FW Thorpe (LSE:TFW) Makes light fittings for   commercial and public buildings, roads, and tunnels http://bit.ly/swTFW2019
Games Workshop (LSE:GAW) Manufactures/retails Warhammer   models, licenses stories/characters http://bit.ly/swGAW2019
Goodwin (LSE:GDWN) Casts and machines steel.   Processes minerals for casting jewellery, tyres http://bit.ly/swGDWN2019
Hollywood Bowl (LSE:BOWL) Operates tenpin bowling centres http://bit.ly/swBOWL2020
Howden Joinery (LSE:HWDN) Supplies kitchens to small   builders http://bit.ly/sw2020HWDN
James Halstead (LSE:JHD) Manufactures vinyl flooring for   commercial and public spaces http://bit.ly/swJHD2019
Judges Scientific (LSE:JDG) Acquires and operates small   scientific instrument manufacturers https://bit.ly/swJDG2020
Next (LSE:NXT) Retails clothes and homewares https://bit.ly/swNXT2020
Portmeirion (LSE:PMP) Designs and manufactures   tableware, candles and reed diffusers https://bit.ly/swPMP2020
Porvair (LSE:PRV) Manufactures filters and   filtration systems for fluids and molten metals http://bit.ly/swPRV2019
PZ Cussons (LSE:PZC) Manufactures personal care and   beauty brands, in the main http://bit.ly/swPZC2019
Quartix (LSE:QTX) Supplies vehicle tracking systems   to small fleets and insurers https://bit.ly/swQTX2020
Renishaw (LSE:RSW) Whiz bang manufacturer of   automated machine tools and robots http://bit.ly/swRSW2019
RM (LSE:RM.) Supplies schools with equipment   and IT, and exam boards with e-marking http://bit.ly/swRM2020
RWS (LSE:RWS) Translates documents and localises   software and content for businesses https://bit.ly/swRWS2020
Softcat (LSE:SCT) Sells hardware and software to   businesses and the public sector http://bit.ly/swSCT2019
Solid State (LSE:SOLI) Manufactures rugged computers,   battery packs, radios. Distributes electronics https://bit.ly/swSOLI2020
Tracsis (LSE:TRCS) Supplies software and services to   the transport industry (this article)
Treatt (LSE:TET) Sources, processes and develops   flavours esp. for soft drinks http://bit.ly/swTET2020
Trifast (LSE:TRI) Manufactures and distributes nuts   and bolts, screws, and rivets http://bit.ly/swTRI2019
Tristel (LSE:TSTL) Manufactures disinfectants for   simple medical instruments and surfaces http://bit.ly/swTSTL2019
Victrex (LSE:VCT) Manufactures PEEK, a tough, light   and easy to manipulate polymer http://bit.ly/swVCT2020
XP Power (LSE:XPP) Manufactures power adapters for   industrial and healthcare equipment https://bit.ly/swXPP2020

Richard owns shares in most of the companies listed in the Decision Engine.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.

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, and 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.

Please note that our article on this investment should not be considered to be a regular publication.

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