Quality shares going sideways (BVXP, HL, JDH, FEVR, CRW, BOO)

I recently wrote about share prices ‘consolidating’ on my blog.

“Quite often a share price runs ahead of the company’s performance and then stagnates as the company catches up. Trouble is you never know when the consolidation period will start and when it will end. Investing for ten years undoubtedly involves watching prices tread water for long periods.”

2021 Q2 TFW sharepad share price

As well as FW Thorpe, another of my shares, Bioventix, seems to be in a consolidation phase. Its price is presently at a level first seen two years ago:

BVXP sharepad share price

A few other ‘quality’ names are in the same boat. Hargreaves Lansdown is almost back to a level first seen five years ago:

HL. sharepad share price

James Halstead is also almost back to a level seen five years ago:

JHD sharepad share price

Fever-Tree is at a level seen four years ago:

FEVR sharepad share price

Craneware is at a level seen three years ago:

CRW sharepad share price

And Boohoo is almost back to a level seen four years ago:

BOO sharepad share price

True, the pandemic will have affected these businesses to some degree (positively and negatively). But I suspect the sideways movements of these shares are not what holders have become accustomed to after some superb gains in the preceding years.

I plan to keep holding Bioventix, but wonder what the views are from anyone else holding the shares above. Happy to hold on and be patient? Frustrated watching other shares moving higher while yours go sideways? About to sell and reinvest into something that has more immediate upside?

The share prices may even reflect that possibility that the best days of these companies have been and gone. Not much worse in the market than holding onto a highly-rated quality name that loses its quality and premium rating.

Thoughts welcome.

Maynard

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Shame no-one has commented on here since I was pondering BVXP. I suspect the answer is to sell and wait to see what the next results bring. My holding is stuck in an HL SIPP while it moves over to AJ Bell so I cannot do anything.

BOO has got a number of issues to deal with so I think that’s just the market trying to work out what to do rather than it going sideways due to lack of interest in the share.

HL has, I suspect gone ex-growth due to competitors eating its lunch. So sell and move on, unless the divi is worth having.

FEVR was a darling stock and I reckon “the herd” have just got bored and moved on. I don’t think it’s viewed as such a multibagger prospect. So I’d sell.

I don’t know anything about the others so cannot comment.

Best wishes
Steve

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Hi Maynard,

Interesting post - thank you. I think it’s largely a valuation thing to be honest. Here are the (rough) P/Es of these shares at the start of the “consolidation” phase you identify:

HL - 32x
BVXP - 27x
TFW - 29x
JHD - 29x
FEVR - 58x
CRW - 33x
BOO - 40x

That’s just very rough looking at the data on SharelockHolmes - so, it won’t be properly correct, but the basic point is, these shares were all very expensive at the start of the consolidation phase.

Quite a few of them are still very expensive now, too, which indicates another problem a number of them seem to have - slowing growth, whether actual or feared. It’s just very hard for a share that is very expensive and has slowing growth to do well over the medium term. The only way it can happen is if it keeps on getting more and more expensive. And if it does keep on getting more expensive, then future returns keep getting worse.

I think of myself as someone who invests in quality businesses (or tries to) and I think cheapness can be a trap. But as soon as you start buying businesses with P/Es materially greater than 20, the maths of actually earning good returns (other than speculatively) just gets quite unforgiving. Even for a high return on capital business, something that’s on a P/E of 30x has to grow consistently at over 7% a year to get you a 10% or greater return (I say over, because it’s rare for a business to sustain a 30x P/E indefinitely - it can only really happen if it’s growing very quickly).

So long as you keep in mind things like:

  • what’s the earnings (or FCF, or whatever) yield I’m getting when I buy?
  • how fast can this thing realistically grow at over the medium to long term?
  • am I likely to suffer multiple contraction?

then you’ll have a decent idea of what returns to expect.

It’s honestly still a problem for some of these companies. I looked at Craneware, for example - I like the business, but it’s hard to see how the risk / reward adds up.

I do hold BVXP, but I’m not sure I’d buy at today’s prices, and the prospects for the medium term don’t look anything like as good to me today as they did say five years ago. It’s a problem.

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I think there is a range of issues with these companies, to which you might add TSTL, Emis, JDG…

I used to hold Emis but, after 4 years sold out. The numbers were always solid but I noticed that the shares traded within a range. In truth, with effectively one customer, who is one day going to have to try to obtain value for money from GP practices, what future is there? It felt like a bond proxy with political risk, eg the “KPI reporting” incident a couple of years ago. TSTL is similarly afflicted by everyone focusing on the US licencing issue.

I suspect Boohoo and FEVR are afflicted by reopening uncertainty. Just what will any new normal, if it ever arrives, look like?

On the other hand, HL’s era might have ended, owing to competitive pressures.

I wish I knew what is going on at JDG, JDH and BVXP though.

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Hi Steve @LLG_Stephen, Philip @Philip_Hutchinson and Diogenes @Diogenes,

Many thanks for the replies.

True, but I think some of them were expensive beforehand, and kept going up for a while before the consolidation phase began! I suspect the price stagnation reflects a combination of market over-enthusiasm in earlier years and a gradual realisation that past growth rates are moderating (or will moderate).

Agreed on the maths with future returns – I believe it’s easier for a share to be re-rated from 8x to 12x (up 50%) than 30x to 45x (also up 50%). Re-ratings are what can really turbo-charge a share price.

De-ratings of course go the other way, and I just wonder now if certain valuations are no longer too exuberant. I have just written a piece for SharePad on ASOS, and arguably its 2023 P/E is not completely outrageous at 20x – and the forecasts do seem achievable. 20x compares to 100x-plus a few years ago. ASOS shares are presently at a level first seen in 2013.

With all this I keep thinking about Halma. During the early 2000s, I held Halma in a Motley Fool educational portfolio. For years the shares were stuck between 100p and 150p as earnings (green bars, right axis) stalled and the P/E was de-rated to 10-15x (black line, left axis).

HLMA sharepad daily pe eps

Eventually earnings took off again and so did the P/E and share price (now c50x and £27). I just wonder if some of today’s high-flyers could de-rate to 10-15x if enough issues emerge to keep a lid on earnings. I would venture the likes of HL etc should have the wherewithal to overcome most operational worries (aside from wholesale industry disruption).

On BVXP, this blog enquiry reminded me that the much-touted troponin test will only earn revenue until summer 2032. So this product ought to be valued on a NPV basis rather than through a simple multiple. The troponin expiry also makes me want to know more about the pollution-monitoring project, which seems to be the most likely of the pipeline efforts to become commercial.

Maynard

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The Halma situation intrigues me. I bought in around 2000 when I was way too busy to monitor things properly but I was drawn by its history of 30(?) years of steady EPS growth. Shortly after, there were a few blips in this story and the share price didn’t move in the right direction. I believe that the management pivoted to focus on safety technology, to become a serial acquirer and also to benefit from the irruption of China onto the world scene. Does anyone here know about what happened to change their share price profile? All I knew was the pleasant sequence of surprises when the 6 month portfolio valuations landed on the doormat

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@MaynardPaton ,

Thanks - interesting reply.

I’m worried about BVXP. It’s a great business, but the Troponin expiry is a fairly major problem. You just can’t - at all - value cash flow that will expire in around 10 years in the same way as cash flow that’s perpetual. BVXP is on nearly 30x free cash flow, or thereabouts, so it doesn’t leave much room for downside surprises. (Obviously the troponin expiry isn’t a surprise, as such - it’s known now - but I have to say the valuation of BVXP doesn’t seem to account for the risks at present, so whether or not it’s “known”, it seems to be disregarded - and that could change very quickly.)

I don’t get the impression that the pipeline will be contributing much to earnings any time soon, either, so that puts all the more stress on this point.

I’m not entirely negative on the company by any means. The business model is great, I like management a lot, and there are potential sources of growth, but it’s one of my shares that does concern me, and I have to say I’ve thought about selling. I’m not sure I can find anything of equivalent quality; and of course there are risks in anything you look at. Ideally I’d trade my BVXP holding for a share of more or less equivalent quality (a pretty tough hurdle, to be fair) but roughly 1/3 to 1/2 as expensive (or more obviously!). There aren’t a ton of candidates. I’m looking carefully at BLV, so maybe that would work. Very different risks though.

The valuations of companies like HALMA seem crazy to me. It’s an excellent company, don’t get me wrong, but at nearly 50x earnings or FCF, it’s incredibly risky. For someone buying today, that’s a 2% yield going in. Let’s say it grows at 8% per annum for 10 years - it’ll still only have around a 4% earnings yield on your purchase price at the end of your 10 years. And if it ends that decade trading at 25x - still a fairly elevated multiple - you’ll have earned nothing for a decade, despite the business more than doubling in size. I know the (recent) historic growth rate is more than 8% per annum, of course. But a lot of that is earned from acquisitions. That’s a problem, because if HLMA is expensive, it’s very likely their targets are expensive too - more than they were in the past - so earning the same returns on future acquisitions as they have in the past becomes more difficult. Not to mention that finding enough good acquisitions to move the needle becomes harder and harder as you get bigger.

This is purely a valuation thing - nothing to do with how good the company is. The assumptions you have to make to earn good returns in HLMA seem so challenging to me. If the company was on 20x, the maths would be very different and these concerns would be much less important. It’s true of other shares too. I hold Experian, for example - and it’s probably equally true there.

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Hi Diogenes

I reckon a new chief exec was the trigger.

This announcement from 2005 said the old boss had improved profit from £29m to £50m during his 10-year tenure. So a CAGR of sub-6%, which is not great. Shortly afterwards the new leader re-organised the group slightly:

The fundamental Group philosophy of giving subsidiaries autonomy and freedom to operate independently remains firmly in place. However, we can do more to leverage the broader product and selling strengths that exist across those businesses operating in the same, or adjacent, markets.

After showing no/low organic sales growth for a few years, reported organic sales growth was 11% for 2006, 8% for 2007 and 8% again for 2008. I think the increased subsidiary collaboration helped get the ball rolling for the next decade. I note the new chief exec remains in charge today.

Maynard

Hi Philip

Can’t really argue with your views on BVXP and HLMA. Wishful thinking probably, but with BVXP, the management has a history of being a tad cautious and I am hopeful some of the pipeline projects may be closer to commercialisation than the impression given to shareholders.

Mind you, BVXP’s market cap is £200m with earnings of c£7m, so even if Troponin delivered another £7m every year, the total Troponin contribution would be 10 years*£7m = £70m and say an NPV of £50m – just 25% of the current market cap. So the pipeline is important at the present valuation I feel for enhanced returns.

General investment options at present seem to be i) pay up for top-quality growth, albeit with the maths perhaps limiting your potential gains, ii) try and find tomorrow’s quality winners today, and; iii) pay modest ratings for respectable progress among lower-profile shares.

I have eschewed i), recently attempted ii) with SYS1 and generally look for iii), most recently with WINK (similar features to BLV).

Maynard

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Hi,

Over 5 years, the annualised total return for a basket of these shares is on average around18%, which is about the same as the average change in turnover and eps - so pretty decent according to SharePad.

I don’t think they are all the same type of ‘quality’ companies, though, looking at the eps changes. Had I owned them I may well have sold CRW, TFW, JHD and FEVR before now because their eps increases are at declining rates, as below. Indeed, their roce seems to be decreasing over time so their moat may have a leak! or they are executing a long-term plan which may or may not be too risky (CRW may be due to SAAS conversion - not sure).

That is my take on it, anyways!

Regards,
Ben

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AJ Bell is another quality share that has been in a consolidation phase since the initial surge in share price immediately following its IPO:

AJ Bell Share Price

AJ Bell looks to me to be a more attractive investment proposition though than its larger peer Hargreaves Lansdown (also going sideways). AJB is growing quickly, increasing its customer base faster than HL and faster than the wider rate of market growth. AJB’s costs per customer (although currently higher than HL’s) are also decreasing as it scales, in contrast to HL’s which in recent years have been increasing:


HL does state in its Annual Reports that it has been deliberately increasing investment over the last few years in order to secure future growth, which may account for some of its increase in costs. Since 2019 HL has been guiding that it expects operating costs will grow “broadly in line with the growth in client numbers”, implying that it expects its cost per customer to remain flat which hasn’t been the case since it started providing that guidance. This could be due to increased marketing during lockdowns. The last two annual reports have both contained the following line:

Cost growth […] was marginally ahead [of client growth] due to the unusual marketing opportunity to acquire new clients and exceptional dealing volume costs.

AJ Bell hasn’t yet reached the efficiencies of scale that HL has, but it’s decreasing costs per customer are enabling it to steadily increase its margins as it scales. HL does have consistently fantastic margins that are higher than AJB but it looks like it may have reached its maximum efficiency of scale, and its margins have actually been slightly decreasing over the last few years:


This contrast is also nicely illustrated by comparing the operational gearing charts of the two companies. Take a look at the consistency with which AJ Bell is managing to leverage its operational gearing to drive profit growth:

I don’t see HL growing any faster than the wider platform market from here and as others have said, it’s likely to come under increasing competitive pressure from the likes of AJB and others. From a P/E perspective AJB is relatively expensive, currently with a P/E of around 38, compared to HL with a P/E of around 24. Historically though these are both at low levels. AJB’s P/E has been steadily dropping since the share price peaked shortly after its IPO.

I guess the key questions for AJB are whether the P/E has now dropped sufficiently to enable a break out of its current consolidation phase and whether it will be able to maintain its current earnings growth rate to support a breakout, if it happens.

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