20 shares for the future

Some of the companies ranked highly by the Decision Engine have questions to answer.

Three years ago Animalcare, which supplies pet medicines and other products to veterinary practices, started an investment programme to enhance generic medicines. The move was a response to increasing competition from other pharmaceutical companies and the increasing purchasing power of veterinary practices, which have joined buying groups or simply consolidated through mergers and acquisitions.

A unique range of reformulated medicines might enable Animalcare to maintain or improve profitability even in more testing times. In the meantime, the task facing management was to maintain profitability so the existing business could fund new products.

Bringing a new medicine to market; feasibility studies, product development and trials (outsourced to contract manufacturers), license applications and product launches, takes two to three years, so Animalcare anticipated its first new product launches in the second half of the financial year just concluded.

Judging by the numbers, the story is intact. The company published its full-year results for the year to June 2016 on 12 October. It increased revenue 10% and adjusted profit 6%. It has no debt and its cash balance increased 30%. Animalcare remains highly profitable and cash generative.

It looks as though launch of the three new products has slipped into the current financial yearBut it didn't launch any new products in 2016. In the full-year results the company says:

"These projects were expected to take approximately three years to reach commercial launch. It is therefore very satisfying to see the successful registration of three products in the period, right on target."

Though it may have achieved regulatory approval right on target, it looks as though launch, which requires Animalcare's suppliers to manufacture and package sufficient quantities of the newly licensed medicines, has slipped into the current financial year.

In the grand scheme of things it's probably not a big deal, as the company is in good shape. But I would have appreciated an explanation, something I will be looking for when Animalcare publishes its annual report, probably later this month, or at the Annual General Meeting in November.

The company owes its relatively lowly position in the Decision Engine's top 20 to its relatively high valuation. A share price of 287p values the enterprise at about twenty times adjusted profit in 2016. The earnings yield is 5%. Investors are probably anticipating three years of investment will start generating a return very soon.

The top 20 shares ranked by the decision engine are:

The ranking is determined by an algorithm based on five criteria: Businesses should be straightforward, generating excess returns, resilient, managed equitably for the long-term, and the shares should be valued attractively.

I score each factor from 0-2, so the maximum score is ten (a share with a very high market valuation like James Halstead (see below) can score negatively on the valuation criteria).

All of the shares in the top 20 scored seven or higher. The algorithm should select the best buy-and-hold investments from a growing list of good candidates I track closely.

Defence technology supplier Cohort is closing down Systems Consultants Services (SCS) and distributing the business among two of its other firms, MASS and SEA.

SCS advises and trains the armed forces, something the MoD is more inclined to do itselfThe majority of Cohort's revenue is dependent on the Ministry of Defence, but only SCS has struggled during six years of constrained defence budgets.

SEA, Cohort's biggest business by revenue, and MASS, its most profitable, have thrived.

The diverging fortunes of the subsidiaries may be explained by SCS's technical consulting focus - it advises and trains the armed forces, activities the MoD is more inclined to do itself.

Cohort's other businesses are more product-focused, expert in communications systems and electronic warfare. Cohort says folding SCS into SEA and MASS will save Cohort £1.6 million a year.

This strategic sharpening could encourage me to rate the company more highly.

In case you missed it, I met the boards of Colefax and Dillistone recently, concluding fabric and wallpaper designer Colefax is a pretty straightforward money making machine, while big-spending software developer Dillistone, is a more difficult business to warm to. Management impressed, though.

Dunelm

Dunelm reported a decline in like-for-like sales for the first quarter of its financial year, which ended earlier this month. It blamed "unusually warm weather". If that's all there is to it, people were too busy barbecuing to shop for curtains, then Dunelm could be good value given its record of stable profitability and cash generation.

Weakness in the share price is pushing the shares higher up the Decision Engine's ranking. New chief executive John Browett and his wife bought more than 18,000 shares costing 821p each immediately after the trading update, so perhaps he sees value in it too.

Dunelm's just published its annual report, and I've placed it near the top of my slush pile.

James Halstead

While the Decision Engine is agnostic about dividends, James Halstead's forty-one year record of dividend rises deserves quiet applause. The vinyl flooring manufacturer's preliminary results show a marginal fall in revenue and a small increase in profit.

James Halstead would be further up the table, were it not for its unappealing valuationWhile growth may have been hampered in recent years, the (no longer) strong pound has hindered exports and a slowdown in hospital refurbishment is reducing UK demand, the company remains extraordinarily profitable.

In terms of the fundamentals the Decision Engine tracks: cash flow, debt, and profitability, and in terms of the resilience of the business and management strength, I can find no fault.

James Halstead would be further up the table, were it not for its unappealing valuation. A share price of 460p values the enterprise at 25 times adjusted profit in the year to June 2016. The earnings yield is 4%.

Victrex

Victrex, which manufactures a high performance polymer called PEEK, has released a trading statement ahead of full-year results to be published in early December.

Revenues from consumer electronics manufacturers were 30% lower in the year to September 2016 than they were in the year to September 2015, and Victrex expects to sell significantly less polymer in this market in 2017.

I don't like it when companies report on significant markets but don't say how significant Electronics is one of five main markets the company supplies, the others being automotive, aerospace, energy, and medical.

Frustratingly, the four industrial markets are lumped together in Victrex's segmental report, making it hard to see how important the volatile electronics segment is. The medical business, Invibio, earned nearly 20% of revenue and more than 25% of profit.

I don't like it when companies report on significant markets but don't say how significant they are. We're only getting half of the story. Needless to say, I am pursuing the other half!

Renishaw

Although they are in different industries, Victrex reminds me of Renishaw. Renishaw mainly manufactures tools that control and automate machines in factories and checks the dimensions of components that have been manufactured by them.

Like Victrex, Renishaw is investing heavily in major new projectsThe two companies probably share customers. Renishaw's tools are used by consumer electronics manufactures to make smartphones and tablets that incorporate Victrex's PEEK.

Like Victrex, Renishaw made a lot of profit from manufacturers in the Far East in 2015 as manufacturers geared up for new product launches. Like Victrex, it couldn't equal that performance 2016. And like Victrex, Renishaw is investing heavily in major new projects.

I went to Renishaw's AGM last week, and will report on it soon.

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

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.