Stock Picks

DRUMMOND; SYDNEY; 970523; PIC BY PETER MORRIS; SMH; BUSINESS; FOR PETER FISH; SAVED TUES-27; PIC SHOWS....HAMISH DRUMMOND, FROM CLOVER CORPORATION IN WARRIEWOOD.  THEY DISTRIBUTE HEALTH OILS.

Oil producer was a star performer last year. Photo: Peter Morris

CLOVER produces omega 3 oils for food products, including infant formula.

It was a star performer last year, with the share price rising 90 per cent as earnings grew and its price-earnings multiple (P/E) expanded.

By the end of the year the company was trading on a hefty multiple of 14.1 times historical earnings. The market warmed to the outlook and that the company had been generating a return on equity of about 30 per cent.

The share price hit a wall towards the end of 2012 when the company said sales growth in the September quarter had been a timid 5.9 per cent.

The company followed that up by forecasting modest sales growth for the six months to December. After initially dropping, the share price has steadied and is trading at about 52¢.

It would be fair to say that if Clover posts 6 per cent sales growth for the financial year the price will adjust lower. Investors will be happy to sit out until they see evidence of stronger top-line growth with new products in 2014.

But if Clover reports a boost in revenue of more than 10 per cent in the December quarter, the price will kick through 60¢ a share.

 

Thorn Group

SHARES in retail rental company Thorn Group have bucked the upward market trend and fallen a hefty 15 per cent in February. Not even an upbeat half-yearly profit announcement from JB Hi-Fi managed to lift Thorn out of the doldrums.

The catalyst behind the recent demise could simply be a correction after a 30 per cent rise in the final six months of calendar year 2012.

A more powerful reason has been the need for analysts to temper their 2014 financial year earnings.

Thorn is unusual because its financial year is to March 31, meaning the 2014 year is only a matter of seven weeks away from starting. Until recently, analysts had factored in modest earnings per share growth in 2014 but a subdued core business - Radio Rentals - plus the need to spend on new initiatives means there now could be no growth for the group.

The company says price deflation of electronic goods and uncertainty in an election year are behind the downbeat environment. Adding to investors' concerns has been the recent sale of shares by managing director John Hughes.

Investors are also concerned that the NCML debt collection business, purchased in 2011 for $32.5 million, has not delivered a decent return.

Thorn Group is by no means expensive, trading about 10 times 2013 and 2014 earnings. If the stock continues to be sold off in the lead-up to the 2013 full results due for release in May, it might present a buying opportunity. Until then, it might be best to observe.

 

UXC/Monadelphous

IT IS difficult to buy a stock that has run hard. It invariably looks expensive based on historical earnings and not worth the risk. But it is important that we don't simply ignore these stocks, because the market might be underestimating earnings growth.

Two such stocks that report earnings in coming weeks are technology services business UXC and mining services juggernaut Monadelphous.

UXC's shares have risen 187 per cent in the past year. On historical earnings, it is trading on about 17 times, which is expensive. Its earnings, despite good growth in the past six months, are not going to justify a re-rating. But investors need to look to 2014, where the benefits of recent contract wins are being underestimated.

The latest, with Queensland Health, delivers a big boost to the top line and should see margins continue to expand. Despite improvements under managing director Cris Nicolli, the company's profit margin still lags competitors and there is significant upside.

Meanwhile, West Australian-based Monadelphous keeps climbing. The latest catalyst has been the better than expected outlook delivered by mining services company Bradken.

Monadelphous trades on a historical P/E ratio of more than 16.5 times, which is remarkably high for a mining services group.

The company will need to grow earnings in total between 40 and 50 per cent in 2013 and 2014 to support the valuation. At the annual meeting in November, the company said it had enjoyed growth of 40 per cent in the December half but watered down full-year 2013 growth to 25 per cent.

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