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So I can buy a share in this company at 8.5 times last year’s earnings.
Surely, you might ask, there must be something seriously wrong with it?
Perhaps earnings and dividends have been volatile?
No. Earnings per share have steadily risen from 11.82p in 2002 to 51.99p in 2015 (with a bit of a dip in 2013). Dividends have steadily risen from 4.17p in 2002 to 13p today.
Perhaps the balance sheet is high risk?
No. It has no debt and cash of £15m, which is equal to 38% of its current market capitalisation.
Perhaps it has poor returns on capital employed?
If it requires massive amounts of additional capital to grow its earnings then shareholders will see little of the earnings it produces because it will have to keep ploughing it back in. But, the evidence on this is very pleasing: over the last seven years the lowest operating profit the managers have generated as percentage of net tangible assets is 26%. The average return has been 30%. There are not many firms that achieve these heights.
Perhaps it has new, inexperienced and incompetent managers?
No. The proven and highly accomplished family controlling this firm know the industry inside and out.
Perhaps the industry economics are poor?
No. It operates in engineering niches with barriers to entry as one (if not the only) leading light
Perhaps it is in a boring sector, doing a boring job?
Ah, there you have me…………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
