Great write up thanks.
Enjoying the reviews, thanks.
To complete the quote from Mr Buffet: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
These are brilliant!! Would you consider doing Halfords? Think it’s an interesting one given the current climate! Their share price rose 25% just today!
Sadly nothing to get excited about. This was before they had to aggressively raise cash and dilute share holders.
Wolff’s Aston Martin stake will be diluted to 0.95 per cent today, following a rights issue by the manufacturer as it raises capital in an effort to turn its fortunes around.
With almost a billion in debt it’s not going to move the needle.
I like the sound of L&G, I’ve had my eye on them and Aviva as they both have some trouble but could make for an interesting buy cheap investments.
Home builders is a tough one, that really economy and COVID-19 driven, though with the lockdown being eased in England there might be some more information from these guys that I can write about. TW is a bell weather for the country so it’s pretty topical!
Didn’t even know they were listed, whoops!
They are a real small cap so I might struggle to get good coverage on them, I’ll give it a look and see.
Thanks for the suggestions! I’ll have a look today and see what information I can find and what would make for some interesting analysis!
Legal & General - LGEN (Buy)
Thank you, everyone, for the kind words. As per @SpyrosL’s suggestion, I’ll be having a look at Legal & General. They recently had their full-year results which mean now is the perfect time to get some updated fundamentals.
“Improving lives through inclusive capitalism”
What Does Legal & General Do?
Before we jump into the analysis, let’s cover off what L&G does to general revenue. They are the UK’s largest investment manager, and among the 15 largest in the world, with more than £1 trillion of assets across its different businesses.
Source: L&G Full 2019 Report
Even before we get into the nitty details of each business line. It’s worth pointing out this is operating profit per division, which is already very impressive looking.
Pension Risk Transfer, this is all about annuities. When you enter retirement you can buy an annuity, this product will pay you a set amount each month/year until you die. The company takes an assessment of how long they predict you’ll live for, how much your pension is currently worth, and then offer a discounted but a guaranteed regular payout for you. As long as the discounts are deep enough, or they correctly assess life expectancy, this is a highly profitable business. This business line focused on bulk annuities, where it buys a “book” of annuities and thus takes on the risk.
Investment Management is the ongoing fees associated with buying funds. L&G has an impressive suite of investment funds. Over 50 different funds ranging from actively managed, passive trackers, fixed income, property specialist, to future themes like ESG or new energy.
Capital Investment Direct is all about direct ownership of larger long term investments. With over £16.3bn invested into UK infrastructure and a planned 80,000 homes by 2020. The projects are happening across Manchester, Cardiff, and Bracknell.
Insurance is what it says on the tin. L&G insurance is both for retail and part of the reinsurance structure too. L&G will take on insurance projects of all shapes and collect the premiums, taking the risk on the negative event not happening.
Finally, we have Retirement Solutions. Unlike the pension risk transfer, this business line deals with individual annuities, not buying a book of annuities to cover. Additionally part of the retirement solutions is mortgage advances, helping retirees paying off their mortgage or remortgaging their properties to free up some cash.
What About The Financials?
L&G is a very strong fundamental company, the real challenge comes with the high expectations the market has of their future returns. The recent COVID-19 outbreaks and insurance claims have damped the share price. Let’s see what that has done for the rating.
Source: Genuine Impact L&G
Out of almost 5,600 companies, L&G has come in #121 for overall quality. This is a very impressive feat. I expect financial companies to rank well for quality due to regulatory requirements around cash on hand but it’s worth seeing the raw numbers behind this to understand what this means.
Profitability isn’t as high as you would expect. Bringing in just below £2.1bn in profit before tax you’d be surprised to know they have left a lot of cash on the table. The profit margin is 9.28%, this leaves them a lot of room to make themselves more operationally efficient and one of the areas L&G can make a real difference in terms of growth. You’d hope they convert more of the £19.7bn in revenue they collected!
It should be no surprised L&G is a cash-rich firm, they have to protect themselves from the insurance payouts, and maintain strong cash flows.
Source: Wallmine L&G
Their liabilities to assets operate around 98% coverage, while expected this does mean the £13.9bn in cash and cash-like assets is very much required.
What I am interested in is the impressive dividend that L&G has maintained. Paying a dividend out since 1993 and currently paying a yield of around 8.5%, this might be the investment for any dividend lovers out there. The dividend has increased 11.3% over the last five years and 6.3% over the last three years. This is very much part of managements objectives and the focus for the business.
Paying out the shareholders is a key metric, which depending on your view could be positive or negative.
Are They Priced At A Good Value?
As mentioned paying out to shareholders has been a key target for management. Alongside this has been the various value ratios and keeping them balanced.
Source: L&G 2019 Full Results
By most measures, Legal & General is a very cheap and underpriced buy right now. I would take these numbers with a pinch of salt as this was managements objective as part of a five-year plan, rather than the natural market valuation of the company.
For me, this signals a great time to buy in while they move into a new strategy while keeping the shareholders at heart. This will likely free up more resources to pump up the dividend or even to increase operational efficiency. Maybe creep that profit margin up.
What Do The Sell-Side Analysts Say?
This is probably the most split sell-side I’ve seen in a very long time.
Source: Genuine Impact L&G
While they have missed the analyst predictions, I suspect this is due to their bigger focus on the company’s target rather than excelling against expectations.
However, you can see there several analysts saying now is the time to exit, a few who want to wait and see, and a slightly larger number looking to buy while it’s cheap.
So why do I think this is a buy?
Source: Genuine Impact L&G
Expected return means the share price increases in value, and expected growth is the revenue and earnings. A growing dividend and growing share price (target price) are absolutely what I am looking for. Increasing their revenue and earnings to meet sell-side expectations while exciting isn’t the be-all or end-all for L&G. Bringing in almost £20bn in revenue, converting that revenue into profit rather than trying to have another explosive growth of incoming revenue isn’t my concern.
Source: Market Beat Target Price
While the target has been decreasing as the share price has fallen, we are still looking at an average target price being 20% higher than the current price.
Source: Wallmine L&G
While the price has dipped and not fully recovered, the dividend for the current year has passed, giving us a clear runway for a recovery.
There have been a few warnings with COVID-19, however this is right now a wider market issue. Being in the insurance space this would have hurt L&G more than others, but with a foot in the investment space, they have been making their own cheap investments.
An ESG Friendly Buy
L&G also score very highly when it comes to their future innovations and investments into a cleaner, fairer future. I don’t truly believe everyone at L&G thing they are a force for good. I’m not expecting their staff to dress up as Batman and beat up Shell employees. Rather L&G knows they have the money to make a difference, and they make a targetted effort to make a difference in the world of tomorrow.
Personally, the increasing dividend and tasty 12-month target share price are what is driving me towards a buy stance, but it helps you feel all fluffy inside while you are doing it.
Let me know what you think of the analysis, do you agree or have another view? Anything you would want me to cover off or think is missing?
Thanks again for reading and enjoying the write-ups!
Thanks mate, really enjoyed that.
Personally I agree with you, I see L&G as a Buy. I think there will always be demands for their products and whilst adverse market conditions impact them from a risk perspective, they have a strong balance sheet to cope if necessary.
Tasty dividend indeed
Great read, thanks @jcksmith850
LGEN are a long term hold for me. Their foray into pre-fab/modular housing is interesting: https://www.legalandgeneral.com/modular/
Thanks for the feedback!
The home building aspect is very cool. I was surprised at the amount of innovation these guys are taking on. They didn’t get their high ESG rating for nothing after all!
I’ve just started my holding in Legal & General so thanks for the analysis. Your review reaffirms my belief that this is a good, solid investment, hopefully! The dividends are an added bonus.
If you’re still taking suggestions would it be possible to take a look at Ocado? They’re an interesting company to me with their own propriety logistics technology as well as a number of new and upcoming partnerships with retailers. It seems the markets agree as well, - the share price has shot up in recent weeks…
Ocado is an interesting one. For a long time they were a real dog of the exchange, however they have shot up with COVID-19 as being one of the few grocers in a strong position to handle the influx (and even they struggled at first.)
It’d be exciting to see what announcements they have done and what they look like now.
I’ll give them a quick look to see what makes for some readable content! Part of the write ups is me having fun researching the companies!
Ocado - OCDO (Hold)
Thanks for the suggestion @Master-Sharefu!
With COVID-19 sending the UK into lockdown, grocers have seen a massive uptick in orders and bulk buying. The frenzied buying behaviour has created unexpected volumes and logistical issues for several firms.
Ocado who have pioneered online grocer logistics and automation were in an excellent position to take full advantage of the panic buying. Does this translate into a stronger future for Ocado? Will they take these strong few months and convert the gains into something greater in the future, or have they wasted this lighting in a bottle moment?
What Does Ocado Do?
Ocado now considers themselves more of a technology company than an online grocer. What happened and what does this mean? Think about Amazon. They made their money as an online marketplace, while they were doing this they created new technologies and services to support their growth, these innovations were viable businesses on their own.
The story is somewhat similar but without the Amazon success story. Ocado’s focus has been on using technology to reduce waste, increase accuracy and speed, and ultimately create more margin where the industry couldn’t. Running a grocer chain is not a high margin business, Tesco has a 1.5% profit margin, so using technology and controlling the vertical value chain is a potentially untapped winner.
Source: 2019 Ocado Strategy
Retail, this is a D2C (direct to consumer) offering, currently, this is a partnership between Ocado and M&S. Originally offered in partnership with Waitrose. It’s a five-year joint venture where it’s expected that M&S will take over the venture and Ocado will move on.
Source: 2019 Ocado Strategy
UK Solutions & Logistics is all about white labelling their different technologies and services. For example, they have a joint venture with Morrisons where they offer the complete service on their behalf. Or they can offer their technology on a licence basis. Right now this makes its money from Ocado Retail (fees), a few select partners who use parts of their offing and Morrisons.
Source: 2019 Ocado Strategy
International Solutions is selling their technology and systems into new markets where Ocado doesn’t have a presence. This is highly speculative as they try to help a brand become a market leader with their technology (in terms of online ordering.) Ocado is still in the position where it’s cutting fees to win deals, this is a very long term business line.
Source: 2019 Ocado Strategy
Finally, we have the Innovation and Ventures arm of the business. As a tech business, they invest in small startups and future trends e.g. indoor vertical farming. There have a big interest in robotics and AI. Improving efficiency and accuracy while keeping costs as low as possible.
How Do The Fundamentals Look?
While COVID-19 has given Ocado a boost they are still recovering from a building fire last year.
With almost £100m in damages, plus lost business and stock, the insurancers have been slowly paying back the cost. The claim of £74m has been received and accepted, however, the last full year statement only £24m was recognised due to the payments being received over time.
Source: Genuine Impact Ocado
With a weak quality rank, a horrific value rank, they have a very surprising momentum rank. I’m keen to dig into the numbers behind the summary to figure out why the momentum is so high if everything seems to be priced in?
Source: Ocado 2019 Annual Report
Let’s pick out the key numbers here. £1.75bn of revenue, £1.164bn spent making that happen. Which still leaves over some money! Then we add the admin costs, distribution costs, and the joint venture loses. We end up with a £0.21bn lose before tax. With some creative accounting about their assets (warehouses, vans, and the insurance payout) we end up making £0.04bn. Not an impressive figure when you compare it against the headline.
However, this was the full 2019 report, we are one quarter in and we have been seeing in the news how successful Ocado has been. The issue is, we don’t have the quarter one numbers yet! So we are stuck with speculation. This goes a long way towards explaining the high momentum. Analysts are making predictions on the next quarter which we know should be better than expected.
Back onto the numbers we have. The profit margin is -12.06% (suddenly Tesco’s 1.5% doesn’t look so bad?), they don’t pay dividends, but they seem to be in control of their debt?
Source: Wallmine Ocado
As a company with lots of physical goods and assets, it’s much easier for them to appear more sound due to the amount of inventory and equipment they hold. The cash flow has also been recently boosted by the insurance payouts.
As the company isn’t turning a profit, they have increased sale volume but not profit, and good results are expected. The share price has rallied, which has completed destroyed the value metrics.
Source: Google Finance for Ocado
A price to sales ratio of 7.70 and price to book of 12.69, this is a stay away, red flag warning, for any diehard value investors. With so much expectation baked into the price, it’s going to be hard to increase the value but easy to have a disappoint that send it crashing back down.
With sentiment on our mind, and expectations. What are the sell-side experts saying?
Source: Genuine Impact Analyst Ratings
We are looking at a fairly even split, but with the Q1 announcement tomorrow, we are seeing a small shift towards a buy rating.
However, keep in mind this is being driven by higher than expected views on the revenue. We still aren’t seeing high earnings expectations or even a meaningful improvement in the target share price.
Source: Genuine Impact Target Price
Expected returns refer to the target share price and it’s increase versus the price now. The expected growth is the percentage growth for revenue and earnings.
With a very low target share price, we are at the high in terms of the current price. As there are no dividends to look forward to, you only have the share price increases as a way to make a profit.
Why A Hold?
I’m very much on the fence with this one. I would almost lean towards a sell rather than a hold. We are at an all-time high, it’s an expensive business which is heavily investing in speculative future bets, and we are still recovering from the 2019 fire.
Ocado is also in proceedings against T0day and others for IP theft, which is currently a negative on their balance sheet due to legal fees. The cash injection with the partnership (over £500m from M&S) is nice but we’ve seen their ventures cost as much as they make.
I wouldn’t be in a rush to sell off my Ocado shares, they are an interesting and innovative company, but if you want to free up some capital this would be a prime target in my mind.
If you don’t hold Ocado I would not consider this as a purchase right now. Wait and see for the announcement tomorrow, and see what the new estimates and growth looks like post-COVID-19.
Let me know your thoughts! Have I missed anything you wanted to cover, or maybe some more information you want analysing?
Thanks for reading and stay safe!
@jcksmith850 Thank you for taking your time to do these, they are super insightful. I was wondering if you would consider writing a post on your thinking process when analysing a business more generally and details on the tools (sites, apps etc) you use along the way?
Hey @jcksmith850, thank you so much for these analyses. I bookmark this thread for my dinnertime reading haha and it’s very informative!
Wanted to ask if you have any views on Trainline? It’s coming up on a year (I think) since their IPO, and the impact of COVID-19 on decreasing nos. of passengers and travelers have surely taken a toll on their business. With lockdown easing (and the looming possibility of a second wave… ) I’m wondering what the future of the travel industry (not even long-distance travel, but day-to-day commuting and e-ticketing for example) would be! Thank you!
Very enjoyable reading thank you for the time and effort!
Good morning everyone, thanks for the kind words and I hope everyone had fun with the crowdfunding! 100% in less than 5 minutes
This might be an interesting post. For my personal investing and any requests I do follow a similar process. Thinking about it, it’s probably really messy this could be a fun one to write about. One part I don’t touch on is when to buy. After deciding a company is a buy I don’t really discuss a good entry point, technical analysis is not my thing. Then again maybe my process can help others?
They have done their full 2019 report a few days ago (they call it their FY 2020 as their business year isn’t calendar annual) and they had this note.
Impact of COVID-19 and outlook for FY 2021:
- Significant impact on trading in Q1 FY2021 to date as a result of COVID-19 lockdown, with UK and European passenger volumes currently down >95%
- Confident Trainline can navigate even an extended downturn if necessary given significant liquidity headroom and mitigating actions taken, whilst maintaining investment in the Group’s strategic priorities to drive long term growth
- As previously disclosed, c.£150 million liquidity headroom expected as at end of May, with monthly cash outflow from operating costs and capex reduced to c.£8-9 million
- Group will update on guidance for FY 2021 once visibility improves
The FY2020 doesn’t include any lockdown impact, and we haven’t seen a quarterly statement with updated figures. So any analysis I look at is using non-COVID-19 data.
Source: Genuine Impact Trainline
Knowing these are older numbers mean the quality rankings will be off, they should be much worse. Same goes for Value. It’s ratios against the current share price but it still uses data from the balance sheet. Momentum is pretty much the only valid thing right now if you are looking for shorter term COVID-19 impact.
Source: Genuine Impact Trainline
I was surprised to see analysts do think there is a future and they are split on this being a buy or a hold. No one is suggesting you sell and get out fast.
They haven’t posted when the next announcement will be but based on 2019 the Q1 results should be first week of July.
They are being very tight lipped and seem to be in a bit of trouble. They have made a bunch of cuts so they survive (and I expect they’ll take on some loans to make sure they have cash flow during this time.)
It’d be harder for me to make shorter term predictions. I try to find exciting longer term companies. Right now I am avoiding the travel industry. Even Warren Buffett has said he made a mistake and has sold all his airline holdings!
I think the trend of companies doing more working from home, plus TFL and other rail operators running reduced services with increased costs, makes it likely we will see additional bailouts for these operators as they are critical to the nation, and generally not that profitable. As long as they are around Trainline will be too. It might just be a much smaller and more streamlined operation!
Thanks for the kind words! I’m glad so many people are enjoying my research and opinions!
Loving these write ups, any chance for RTX?
How I Analyse and Invest
Thank you @nimrod22 for the suggestion. I figure this would be a good time to talk about the steps I take when looking for an investment, and how I analyse any stocks or ETFs which get suggested.
I have also cleaned up the first post to include quick links to each analysis piece, also to provide some timestamps against my views in aggregate!
Screening and Discovery
When I’m not getting suggestions from the kind commentators on here, I have a few go-to places to find trade ideas.
I find Business Insider useful for a summary on the markets in a macro sense as well as anything exciting happening right now.
Additionally, I check out the daily Finimize email. I like these guys in terms of bite-sized news stories. This is more “water-cooler” talk.
Stock and Fund Screeners
If I am looking for a dividend or raw datapoint, then I like the stock screener on Wallmine. Easy enough to use if you are looking for high dividend yield companies to investigate.
When searching for new investment ideas I use Genuine Impact. I tend to look for high-quality companies with strong momentum that does not have a low-value rank.
I’ve also used Simply Wall St for investment ideas but I prefer the rankings over the checklist approach. I find these guys are a merge of Genuine Impact and Wallmine, but I like to reference them from time to time.
If I am looking for an ETF and want to slice and dice my options more I like to use JustETF and their screener. A nice way to find an ETF with a particular focus to then investigate.
Get The Summary
When I know what stock or fund I want to investigate my first check is a health check with Genuine Impact. Normally I’ve checked out the top factors (the free stuff) and I am looking into the details now.
First I checkout profitability, a poor rank here normally means they aren’t profitable yet. I then assess the expected returns, I want this rank to be as close to #1 as possible. High target share prices are very attractive to me. Expected growth of revenue and earnings is also attractive but I often find this is priced in, still a good reference point.
A quick check on dividend yield to see if there is one or not, not too influential to my process but may change when I invest (I’ll have to look for the ex-date.) The rating change is important to me, knowing if sell-side analysts are changing their view a sign of what is happening in the immediate term. Having no buy ratings, or overwhelming sell rating is a massive red flag for me.
Understand The Company
Next up is figuring out what the company does and why. Easy way to find this is a Google search for “company name investor relations” this should take you to the investor site for that company.
I am looking for a few key documents. Reports and documents (I like the powerpoints to get a nice summary of what is happening.) Events calendar which shows dividend timings and when the earnings are announced. Tools like Genuine Impact, Simply Wall St, and Wallmine are using the fundamental data from the last report. If the last report wasn’t for a while then (e.g. due soon) I will often hold off any decisions until there is more clarity.
Additionally, I like to look for the strategic vision or anything which details their longer-term plan. I want to see future investment or innovation. Situations, where they are not innovating, or assume they will keep market share, with no consideration for new disrupters, is also a red flag.
Full Year Earnings
This is a key document for me. After looking through the high-level PowerPoint (which simply paints the best possible picture) it’s time to dive into the last full-year earnings release.
Most of my time will be spent reading through this document. There is a lot of fluff, but also a lot of warnings and expectation management. Was does this document mean for the future.
You can read through the full financials if you are an account but I find them very boring. Rather this is where I move over to Wallmine to checkout the ratios and headline financial figures. You can get the same data on Yahoo Finance but I find the interface and experience way nicer on Wallmine.
I’m looking for the ratios behind the summary rankings. What is the profitability, is it growing, do they have strong cashflow, are they taking on more debt than they can handle. Is this a high revenue, high-growth investment?
Latest News and Views
At this point, I should have a feeling if this company is as good as the first few health checks and screeners said it was.
Now it’s time to understand what is happening for this company right now, and also to get more detail sell-side analyst views - in particular target price.
First I search Google News for “company name share price”. I am looking for financial pieces related to the company. By adding share price it filters out a lot of random comments and stories which don’t impact my investment. If I do make an investment and it’s a company I wouldn’t naturally be keeping up with, then I also set up a Google Alert for that search query (pro-tip, setup some email filters as the subject lines are predictable, then you have an easy reference point for your investment daily news.)
Finally, I want to check out the sell-side analysts for a target and to double-check the coverage. I use Marketbeat for this. Wallmine does analyst coverage for US stocks by for UK stocks I use Marketbeat. I’m not a fan of the site interface and find it annoying but it gives me the data I need.
The Missing Bits
What I haven’t covered is portfolio construction, allocation monitoring, trading timing, and when I decide to exit an investment. For right now this is how I find and then analyse a potential investment.
The idea is to have a broad first bucket and then filter out stocks and funds as the process becomes more time-intensive.
Hopefully, you’ll see a few new tools, or suggest some tweaks or new tools for me!
Bit of a break from security analysis but I’m keen to pick up another stock/fund tomorrow. I’ll have a look through the suggestions or checkout any recent earnings for an interesting new company.
Thanks again for reading and I’m looking forward to your comments!
Thanks so much for sharing this. It’s not just the resources that are super helpful (some of them new to me), but also showing the discipline that comes with it. Really appreciate the insights and knowledge you are bringing to this already amazing community. Keep it up!
Thanks a lot!
I’ll look through this thread and see what would make for an interesting write up today, or maybe checkout one of the upcoming dividend companies. There is a lot of love for dividend firms on the forum and one of the members has put together a really good web page that I wanted to checkout a bit more.
If nothing else this is great for my confidence