Eddie Stobart Logistics is looking undervalued trading at a rating that is half of its peers on 6.6 times historic earnings and yielding 8.8%, writes Mark Watson-Mitchell.
What parent or grandparent has not tried to entertain the children on long car journeys?
The remedy so often in the survival guide is to play the ‘Lorry Game’, with points being awarded for every Lidl, Tesco, Aldi, Argos, Sainsburys or Waitrose lorry being spotted. And then there are double points for identifying an Eddie Stobart lorry.
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Admit it, we have probably all done it.
Well, with some 2,700 vehicles and about 5,000 trailers, spotting the lorries of Eddie Stobart Logistics (LON:ESL) is relatively easy as we drive around the country’s roadways.
From operations at 43 centres throughout the UK and in Europe, the group employs a total of over 6,500 people in providing its end-to-end supply chain solutions to its national and international customers.
From its start way back in 1970, the company has built up over the years through organic and acquired growth. Today it is probably the most famous transport group in the UK.
And it possibly offers the most comprehensive range of services to its retail, consumer, industrial and e-commerce customers – such as Waitrose, John Lewis, Screwfix, Sainsburys, Tesco, Dunelm, Mayborn, Aldi, Prezzybox, Paperchase, Cath Kidston, Made.com, The Works.co.uk, Medicanimal and even Fortnum & Mason – the list is almost endless.
All of those clients are seeking solutions to their business-critical supply chain management. The group offers just that – fulfilment, reverse logistics and carrier management and all the processes in between.
Over the years the group has been investing significantly in building up its software and operational capacities as its multi-channel operating clients demand even greater service, as opposed to doing it all themselves.
In the 2017 year, to end November, the group saw an impressive daily revenue of £1.71m, last year it jumped to £2.31m a day. This year could well see that figure increase to £2.66m each day and that still impressive figure is after the company’s recent trading update.
Early in July it reported that slower-than-expected productivity improvements for the contract logistics and warehousing had led to lower management expectations for the current year.
In 2017 the Group reported revenue of £624m and pre-tax profits of £37.8m, with earnings at 9.8p and a dividend of 5.8p per share.
Last year £843m of turnover generated £49.2m of profits, earnings of 11.3p and a dividend of 6.3p.
Research analysts are estimating that this year could see £970m of sales help to make £57.5m in profits, which would pump earnings up to 12.3p and produce a twice-covered dividend of 6.6p per share.
Then the coming year with £1.04bn of revenue is suggested to push profits still higher to £63.6m, worth 13.6p in earnings and a dividend of 6.9p.
Certainly, it is very evident that the overall marketplace in which Eddie Stobart does its business is continuing to provide some substantial long-term opportunities for organic growth.
The group does have a fairly large debt of £160m at the last count; however, I understand that analysts are looking for that to gradually reduce over the year to around £154m, which would put the gearing level at around 64%. On the face of it, that does look large but at the rate of the group’s cash generation I am not at all perturbed by such gearing.
However, what is well worth noting though, is what could well be a brake on the share price of Eddie Stobart Logistics. And that is the fact that the very troubled Woodford Investment Management controls 22.89% of the ESL equity. They recently reduced their holding from 25%.
Other large holders include:Stobart Group (11.78%); AXA Investment Managers (6.6%); DBAY Advisors, who recently halved their holdings (5.07%); Invesco Assets Management (4.8%); and Schroders Investment Management (3.5%).
Berenberg analysts are going for a 130p target price and rate the shares as a ‘buy’, whilst Edison have a discounted cashflow based valuation of 154p a share.
Without doubt, the group’s shares at just 71.5p are looking cheap, trading on a mere 6.6 times historic ratio and just 6.1 times current year earnings and yielding a beautiful 8.8%. That values the whole group at just £278m
That 8.8% is a very healthy yield, whilst its 6.6 times historic price earnings ratio is possibly half of the average of its peers.
My instinct is to forget the Woodford hassles and take advantage of the current low share price – it has almost halved over the last year, they could well be close to the bottom.