Shares for the future: ranked for the first time

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:

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.