Anixter Distributes Growth

Anixter Ohm Sweet Ohm

Anixter is a world leading component distributor and a good play on global growth in manufacturing. The recent results were excellent and the stock has many positive drivers. It is a good stock to research. Rising commodity cost pressures are always a concern but, as a distributor, they should be able to pass raw material costs on.

Before talking about the company in more detail, I want to make some remarks on the recent results.

Anixter Q4 Results

According to Anixter, the global manufacturing outlook appears to be accelerating. For example Anixter sales are normally down 3% sequentially from Q3 to Q4. However, this year there was a sales increase. Most notably, it is North America and Europe that is normally weak in this period, but this year Anixter saw increases. Emerging markets were strong, in line with what everybody else is reporting in the sector.

The results weren't entirely positive for Anixter as they suffered a $17.3m unfavourable movement from discontinuation of a key Alcatel-Lucent account. On the other hand, Anixter benefitted from $19m in favourable copper pricing. In addition, Anixter have made good progress in managing working capital requirements as revenues have picked up. Ultimately, this will help cash flow generation in future.

From the conference call...

'we had some very strong focus on working capital management with $500 million roughly increase in revenue if you look at our historical measures where it takes about $0.25 of working capital per revenue dollar, that would have implied a working capital investment for the year of somewhere in the range of $125 million. But I think the actual number was somewhere in the $30 million, $40 million range. So we feel that we did a pretty good job on getting some enhanced inventory turns in certain parts of the business, getting better receivable collection in parts of the business. We certainly are going to continue that focus as we go into 2011. I'm not sure we can expect to get quite that much leverage other than that'

...in other words, they have demonstrated that the increased revenues are creating accelerated cash flow generation. This is a critical point for distributors as they can easily find growth being financed by having to increase inventories disproportionately. 


Anixter End Markets

Anixter has three main divisions and various industry verticals within these divisions. I'll briefly run through them in turn.

Enterprise cabling and security, representing 54.1% of revenues. Anixter is seeing good growth in IT infrastructure spending. In particular, Anixter is exposed to security and video surveillance spending, IP video networking and data centre spending. All of which look set for good growth in 2011.

Wire and Cable, representing 31.8% of revenues. This division looks set for strong growth in 2011. It is heavily exposed to late cycle major engineering projects. In particular with industrial, mining and energy projects. Quoting from the conference call..

'Mining projects in South America and Canada are going gangbusters. There are new mines opening in China, in Northern China. There are a lot of gas projects in Australia and Indonesia right now. There are gas and oil projects in the Middle East. There's a lot of development continuing there and power gen, there's projects in the U.S., Europe, North Africa, South America and Asia. So fairly broad I guess I'd say in the Emerging Markets, the places where you typically think of resource base and oil and gas kind of projects.'

....and this division looks set to provide Anixter with the strongest growth prospects for 2011.

OEM Supply, representing 14.1% of revenues. This division is the earliest in the cycle for Anixter and should see tougher comparables going forward as a result of recovering first. Furthermore, Anixter management were keen to note that they key aerospace industry vertical is likely to be flat for 2011. The relative weakness of aerospace supply is that Anixter's customers (Boeing and suppliers etc) still have inventory to workdown. Furthermore, Boeing 787 delays are holding back sales and Anixter is not a major supplier to Airbus.

Anixter Stock Evaluation

Anixter analyst forecasts are for EPS of $5.03 and $5.75 for 2011 and 2012 respectively. With a current share price if $68.5, this puts Anixter stock on forward PE ratios of 13.6x and 11.9x respectively. This is attractive for a company set to grow earnings in the teens. However, I always think that distributors should command an evaluation discount because of the gearing towards risk. A lot of good growth has been priced in and, any slowdown in the global economy could leave them with unwanted inventory and falling margins.

That said, growth prospects look good for 2011 and I think Anixter stock is better priced at closer to $77 or 15x 2011 forecasts. I will look for a dip here before buying, as a 12% return is probably not enough for me and the stock price has risen strongly recently. I don't like buying stocks too far from the 50 day moving average.

Virbac Offers Secular and Cyclical Growth

Virbac Looking After Animal Health

Virbac is a very interesting animal health pharmaceutical company and a good stock to research. It offers a good balance of secular growth from companion animals (pets) and exposure to the positive long term trends of food producing animals. I think is a good stock to buy and picked some up recently. It is a good stock to hold within an agribusiness focused portfolio.

For potential investors, Virbac's companion animal segment growth should be seen as trending with general increases in pet populations and, with company specific issues like new product releases and market share grab. Alternatively, the food producing animal segment is more cyclical and exposed to the increasing usage of parasiticides, antibiotics and vaccines in animals. I think this is a good long term trend as protein consumption is on the increase and utilisation of animal pharmaceuticals will help to deal with increasingly concentrated production techniques.


Virbac Revenue Breakdown

Here is a table of percentage of revenue share by geography and segment to the half year of 2010

%	Rev Share	Growth
Europe Companion	34.6	20
Europe Food	15.8	0
N America Companion	14.1	25
RoW Companion	11.1	27
RoW Food	21.7	66

Source: Virbac

Clearly there is a slowdown in European Food market and high feed prices have not helped. However, the good news is that this segment only makes up nearly 16% of revenues and the rest of the world is doing fine. Moreover, there is a clear split between how bovine products (77% of food revenues) are performing and how swine & poultry are currently faring.

The companion market is doing very well with new product launches and a return to economic growth.



Virbac Food Producing Animal Markets

For 2010 Virbac reported 5% organic growth in this segment. As discussed above, emerging markets are doing much better than Virbac's core market of Europe and in particular France. These markets can be seen as cyclical and dependent upon the dynamics of production/price factors in these markets. What is common to all of them (swine, poultry and bovine) is that they are experiencing rising feed costs.

When feed costs rise, supplier's margins get squeezed unless they have pricing power through relatively low production. Ultimately, the price increases tend to cause production expansion. It is a classic commodity price cycle. Here is where we are now with swine...

...and with bovine...

...so it looks like, after a very difficult period from summer 2008 to Jan 2010, prices are very strong. Although feed costs are high, as long as prices are high, margins and profitability can expand. This will encourage future production. There is an unfavourable supply/demand balance in poultry but only makes up a small portion of Virbac's overall sales.

Unless a global economic slowdown ensues, I would expect production expansions in bovine and swine and this has to be good news for Virbac's sales of parasiticides and antibiotics.

Tyson foods recently gave a very upbeat outlook for 2011.


Virbac Companion Animal Market

This segment makes up 60% of sales and revenues in 2010 were up 13.5% organically. I've broken down sales in this segment by product here

%	Rev Share
Parasiticides	30.8
Vaccines	14.6
Antibiotics/Dermatology	14.9
Specialities	12.6
Horses	7.9
Petfood	6.6
Others	12.6

Source: Virbac

Of particular note was the success of Fiproline and Effipro (Europe)which are spot-on and spray products that treat flea and tick infestation in cats and dogs. They were launched in July 2009 and have already grabbed good market share. Virbac has a sales target of E15-20m and sales were estimated at the top end of this forecast. Virbac intends to launch Effipro in the US by the end of 2011.

Of the existing products in the US, sales of Iverhart (heartworms) have been expanding rapidly. Going forward Virbac plans to launch Canileish (canine leishmaniasis vaccine) by the end of 2011 with a European sales target of E25-30m.


Virbac Forecasts

With the new product launches in the companion sector plus a cyclical pick up in the food sector, I think Virbac is capable of hitting analyst estimates and possibly exceeding them. Here is a summary of consensus forecasts

(m's)	2007	2008	2009	2010E	2011E	2012E
Revenue	438.6	443.4	467.4	572.5	612.3	659.4
growth %	9.2	1.1	5.4	22.5	7.0	7.7
EPS (c)	360	411	448	650	707	791
growth %	23.7	14.2	9.0	45.1	8.7	11.9

Source: FactSet Research Systems Inc

At a current share price of E111 this puts Virbac on a forward PE of 15.7x and gives a market cap of E965m and an enterprise value of E998m. Free cash flow generation has also been improving with generation of E23.7m and 42.6m for 2008 and 2009 respectively. On a trailing basis it is E57.6m
I think Virbac is attractively priced for its long term growth prospects and the recent dip could be providing a decent buying opportunity with a target of E129 in mind.



Source:
Virbac 2010 Sales release

Begbies Traynor A Counter Cyclical Share that Benefits from Recession

Begbies Traynor is an interesting business to do a bit of equity research on. What makes it an attractive stock, is that it is an insolvency practitioner and should give counter cyclical growth. In other words, it is a nice way to balance your portfolio. Furthermore, over the years they have been making acquisitions and consolidating in order to achieve growth. They gave a trading statement a few days ago..

"As a consequence of this, together with an increase in finance costs resulting from the Group's new banking facilities, we expect adjusted pre-tax profits* in the first half year to be around £0.7m below last year's results of £4.3m. Following some restructuring undertaken in the period, exceptional costs of approximately £0.8m have been incurred in the half year."

Frankly, this sort of thing no longer surprises me about Begbies Traynor. Whilst, they were a great counter cyclical stock to buy in 2008, their management has-in my humble opinion- a bit of a patchy record. I'm not trying to do a 'hatchet job' here but rather analyse how best to view this company and trade it. I've held this stock before (in 2005) and was amazed to look at it again and, see that it is back to the price that I had paid for it in 2005.

In 2005, Begbies Traynor was a recently listed stock that was acquiring private practitioners and consolidating them. The investment proposition was compelling because you got growth through earnings accretion plus upside potential from a slowdown in the economy. It is easy to see how this would balance the portfolio. It worked. The share price went on to tough the dizzy heights of 200p although I was long since out by then.

However, since 2006, BEG seemed to lose their way.  During 2006 the UK economy progressively got better and as a consequence liquidations fell. As liquidations fall, so the pipeline of insolvency practitioners will fall too. Perhaps as a consequence, they expanded their corporate finance activities, in order to balance the future slowdown in insolvencies. However, the commentary in their trading statement of Oct 2006

"The directors are, therefore, unaware of any reason which would explain the recent downward trend in the market price of shares in the company."

suggests the management are a bit 'out of touch' with what moves share prices. If insolvencies are falling, so should the prospects for listed insolvency practitioners. It's not rocket science. See the downward move in 06-07 here


                                                               Compulsory            Creditors

Liquidations            Voluntary

                                Total                                                     Liquidations                           

2000                14,317            4,925                 9,392

2001                14,972            4,675               10,297

2002                16,306            6,231               10,075

2003                14,184            5,234                8,950

2004                12,192            4,584                7,608

2005                12,893            5,233                7,660

2006                13,137            5,418                7,719

2007                12,507            5,165                7,342

2008                15,535            5,494              10,041

2009                19,077            5,643              13,434

 source: http://www.insolvency.gov.uk/otherinformation/statistics/201011/table1.pdf, figures are not seasonally adjusted


Begbies reacted to this by increasing their corporate finance arm. It wasn't enough and the inevitable profit warning came in Dec 07

"Despite an anticipated stronger second half, we cannot be confident that the profit shortfall from the first half will be recovered. Consequently, the board currently considers that the Group's operating profit for the full year to 30 April 2008 may be 20% below that reported for the prior year."

bundled with the confirmation of a slowdown in the once booming IVA market for them. The share price got back down to 87p. Of course, this then proved an opportune time to buy as the credit crunch hit and the recession provided them with good opportunities. See table above.

The share price recovered to nearly 200p at the time of the height of the credit crunch in Autumn of 2008. Since then, it has been downhill all the way, as the economy recovered...

Table I. Company Liquidations in England and Wales (seasonally adjusted)

                                                                                                                                                            

                                                                                                                                             %Q3 2010               

                                                      2009 Q3    2009 Q4    2010 Q1    2010Q2 r     2010 Q3 p       Q3 2009     Q2 2010 

Company Liquidations                     4,615           4,457        4,060         4,063           3,974                 -13.9           -2.2
of which: Compulsory                       1,289           1,331       1,298          1,164           1,126                 -12.6           -3.2

               Creditors’ Voluntary2         3,326           3,126       2,762          2,899           2,847                 -14.4           -1.8

source: insolvency.gov.uk

All of which leads us to the recent warning. So is this a good time to buy and, what can we learn from this?

I think it is better to focus on the overlying economic fundamentals and the insolvency data, rather than the managements statements. They do try and mitigate the macro drivers but it has proved to be a mistake to rely to much on their commentary. Similarly, I wouldn't take their 'Red Flag Alert' monitor too seriously, when making an investment decision over Begbies Traynor.

 History shows us that insolvencies were in an uptrend in 2008 and you would have made good returns by waiting for an uptick in this metric before buying the stock. This is a stick to monitor, and this may prove an opportune time to buy, but I think it should be on monitor for now.

Galapagos NV. An Exciting and Well Balanced Biotech Stock Gives Pipeline Update

Galapagos NV is a Belgium based biotech stock. It is profitable and cash flow positive. Galapagos business model is a combination of selling their drug discovery services (Biofocus and Argenta) to big pharma co's (ex Glaxo SmithKline, Johnson & Johnson, Lilly, Merck and Roche) whilst having a proprietary and partnered development program. As such, they are self funded and sustainable. Thet also have a large-but very early stage-pipeline.

Today they announced that one of the five of their own programmes had successfully completed it's first in human trial. GLPG0429 is a drug in trials for cachexia (weight and muscle mass loss)  but they also believe it could be indicated for Duchenne muscular dystrophy.

This was a Phase I trial intended to demonstrate safety, tolerability and pharmokinetic profiling. No adverse effects were reported. They expect to conduct another Phase I to assess safety and tolerability in 2011, with a proof of concept trial pencilled in for late 2011.

As outlined above, Galapagos has a very early stage pipeline, but this flow of news is positive. Galapagos is a longer term speculative play, whose downisde is limited by their drug discovery services, yet provides good upside potential.

source: http://www.glpg.com/press/2010/43.htm

RPC plc. A Plastics Packaging Company and Restructuring Story.

RPC is a supplier of rigid plastic packaging.  It is an interesting stock because it gives you the chance to play lower oil prices (margins should improve) not only via lower polymer prices but also via lower energy prices. Conversely, margins would fall should they oil prices go up.

RPC’s end markets tend to be loaded towards the food sector and also towards household consumer products like lipstick cases and coffee capsules etc. As such, they can be seen as a defensive play. They sell primarily into Europe, having expanded into Continental Europe over the years. The three divisions of thermoforming, injection moulding and blowforming are all single digit margin businesses.

Even though they are defensive in their end markets, they are still cyclically exposed because when economies slowdown in industries like plastics manufacturing-capital intensive, operators need to keep capacity utilisation high-they usually get price competitive and try to grab market share.

Before showcasing the numbers, I should point out that these numbers are adjusted to exclude restructuring costs. And there has been a lot of restructuring over the years! In a sense, the story of RPC is a company struggling against rising commodity costs whilst refocusing their activities and making cost efficiency savings.

RPC					Year to March
			2006	2007	2008	2009	2010
Turnover			611.5	645.7	695.2	769.1	719.9
Adjusted Operating Profit			36.8	38.1	40.6	35.5	40.9
Margin			6.02%	5.90%	5.84%	4.62%	5.68%
Inventory			86.37	94.20	110.30	87.90	96.40
Inventory Days			54.85	56.59	61.50	43.73	51.82
Debtors			117.29	128.20	139.90	120.70	125.80
Debtor Days			70.01	72.47	73.45	57.28	63.78
Creditors			135.87	130.80	157.70	164.60	185.60
Creditor Days			86.29	78.57	87.93	81.90	99.77
Op Cash Flow			66.60	65.10	56.20	49.60	55.90
Working Capital			-2.09	-24.20	7.30	65.60	15.50
Tax			-9.67	-7.50	-10.90	-5.10	-2.20
Interest			-7.92	-8.40	-10.60	-10.60	-4.50
Net Op Cash Flow			46.93	25.00	42.00	99.50	64.70
Capex			-50.31	-35.50	-33.40	-33.40	-28.00
FCF			-3.39	-10.50	8.60	66.10	36.70
FCF*			-1.30	13.70	1.30	0.50	21.20
FCFYield			-1.17%	-3.64%	2.98%	22.91%	12.72%
FCF*Yield			-0.45%	4.75%	0.45%	0.17%	7.35%
FCF*Normal			5.44%	5.27%	1.39%	-0.24%	5.13%
Depreciation			-33.31	-34.00	-30.70	-34.60	-34.40
Capex/Dep			1.51	1.04	1.09	0.97	0.81

I should explain that FCF* is simply free cash flow but with working capital neutralised. Similarly, FCFNormal is the free cash flow whereby I have equalised capex with depreciation. It helps to get a clear picture of what is going on.

Again, I should point out that almost every year there have been substantive restructuring. However, RPC know feel that they are beyond the restructuring phase and can now pursue growth. Indeed, free cash flow generation has been very strong recently but I suspect there will be some 'payback' as inventory levels may need to rise. Similarly, I'm not sure if the change in working capital (from a negative to a positive) is sustainable going forward. Their working capital requirements are somewhat dependent on where commodity prices go.

Longer term growth rates look to be around 4% but there is a cyclical element which will be tied to European growth rates. They do try and pass on oil price rises but are susceptible to sharp and volatile upwards movements.

In general, I like the restructuring here and think the current share price gives good value. However, I did not take a position as -short term- there are significant questions over the ability of European consumers to borrow as a result of the Sovereign Debt Crisis. The nightmare scenario for RPC would be surging Oil prices driven by emerging markets and speculation, coupled with European consumer entrenchment over austerity measures.

However, this is definitely one to monitor.