All 4 stocks start with the letter S !
1. Somero Enterprises Corp. 433p share price. Down 15% in the past month and down 5% on Friday.
Market capitalisation is £243 million
Net cash position is £32 million
So enterprise valuation position is £211 million
Forward PE valuation is 9.2x, past PE valuation is 9.1x
4 reasons I think this is a great stock
1. Niche monopoly business
Somero invented, assembles and sells laser screed machines, which are machines used by concrete contractors to create flat floors. These are essential for warehouses where high racking needs to have a perfect supporting base, huge skyscrapers where even small unevenness can cause huge problems, and many more applications. They are the global leader in laser screeds with nearly all of the entire market and only small competitors like Ligchine existing and other technologies like power floats being worse alternatives. Selling great products with strong support keeps customers loyal and creates a fantastic financial dossier with gross margins of 55% and profit before tax margins of 28%. These margins means inflation is no big problem here! This monopoly is protected by over 90 patents.
2. Innovation engine up and running
Somero's management are top notch and have continued to expand the market opportunity for this business, launching new machines that better work on narrow roads (SRS-4), high rise machines too (Skyscreed) and other concrete problem solvers too (SkyStrip, Broom & Cure). Pushing forward product innovation remains a big focus for Somero and this is having real traction. In H1 2021 new product revenues was $4.8m of the business revenue or 7% of all of the revenue of the group. I expect Somero will create new innovations and start to sell these this year.
3. Winner from online shopping trends
Flat floors are essential for warehouses and logistics centers where you create huge racking systems that need a perfect base, and where you may start to put in autonomous robots to pick and move items around the warehouse. The warehousing industry is booming. Just in the UK research from Knight Frank says that 37 million square feet of warehouse space was forecast for construction in 2021, way up on 21 million square feet in 2019. Online shopping is not going anywhere anytime soon, contractors will need to build these and Somero should benefit.
4. Attractive stock valuation
Somero has had a record breaking 2021. That should make some investors nervous because can they repeat this mean feat, but brokers and the company are confident they can. The forecasts call for another 62p of EPS in 2022 which makes the stock on only 9.2 times P/E and with more than 10% of the market capitalisation in net cash to boot. Somero stock is up 232% since 2006 and I think there is more to come from this long term concrete machinery products titan.
2. Sanderson Design Group PLC. 130p share price. Down 28% in the past month and down 9% on Friday.
Market capitalisation is £92 million
Net cash position is £17 million
So enterprise valuation position is £75 million
Forward PE valuation is 9.0x, past PE valuation is 9.7x
4 reasons I think this is a great stock
1. Rare cheap entry into luxury goods
Luxury goods businesses can be great investments because they have strong pricing ability, loyal and structural customer bases, and the brands have real value. When I think luxury goods, I think of brands like Ferrari, I think Gucci, Lamborghini, Rolex, Moet or Cartier. Some of these brands and the companies involved trade expensively. Sanderson Design group has many luxury brands but in fabrics and designs, and not in cars, spirits. Sanderson's products are sold into consumers and many affluent ones and the gross margins as a result are spectacular at 62% making them well placed to pass on inflation.
2. Great heritage brands
Sanderson's brands are Clarke & Clarke, Morris & Co, Harlequin, Sanderson, Zoffany, Scion and Anthology. Such are the histories of these brands that Morris & Co and Sanderson last year held their 160th anniversary. When the average company nowadays may only live 15-20 years, these brands stand the test of time, with protected proprietary patterns and designs that endure and hold real shareholder value. Evidence for that is that Sanderson licences its designs and styles for 6 figure deals to giant consumer goods businesses like NEXT, Sangetsu and Williams Sonoma.
3. Management transforming the business
Lisa Montague has changed the fortunes of Sanderson since she was brought in as CEO and she has before had roles at other luxury goods companies like Loewe and Aspinal of London. Sanderson or as it was known, Walker Greenbank, lost its way in the yeras before she was brought in, suffocating the creative power of the brands and lacking innovation in sales practices to end consumers. Since Lisa has come in she has had strategic priorities set out and delivered on, bringing creative and working capital focus to the business (reducing the number of fabric and wallpaper SKUs from 20,000 to 13,500), kickstarting a digital strategy, rebranding the group, and now driving sustainable growth in brands, manufacturing and licencing going forwards.
4. Attractive stock valuation
Sanderson is valued on 9.0x current year P/E or 9.7x on the past year basis and it also has £17 million of net cash or a whopping 18% of the market capitalisation. This is a luxury business on a discount 0.67x sales valuation that has a real growth opportunity ahead of it as its transformation continues to evolve and as the true value of its brands is brought out to flourish.
3. Supreme PLC. 171p share price. Down 17% in the past month and down 9% on Friday.
Market capitalisation is £199 million
Net debt position is £8 million
So enterprise valuation position is £207 million
Forward PE valuation is 13.6x, past PE valuation is 14.5x
4 reasons I think this is a great stock
1. Founding family led business
In empirical data, some of the best businesses in the stock market to own are the ones where they are founder/family led and where the founder/family have a big incentivising stake in the company. Introducing Supreme, where we have Sandy Chadha who has spent more than 30 years with Supreme and who as CEO is responsible for overall management and group strategy. He joined his father's company after leaving school with no qualifications and has turned the business from a struggling radio and watch seller into now a big UK wholesale distributor and manufacturer. Sandy owns about 57% of the shares in the company so he is fully aligned with the journey.
2. Bigger product list increases the market opportunity
One of the risks with Supreme is that its product catalogue has been mostly in areas of barriers, lighting technologies and vaping equipment (35% sales) and the last of those has some risks on it. The vision and ambition is to move into being a broader platform for fast moving consumer brands and recent growth ventures are in areas such as vitamins and wellness products and sports nutrition. Take Sealions Vitamin, offering vitamins and wellness supplements and who offer customers a year's supply of vitamins like Vitamin D3, C, or Fish Oils at a fraction of the price of other leading brands. In the past half sports nutrition and wellness revenues rose 192% and the bigger the product platform the less risk going forward. The end customer list has many discount retaielrs and supermarkets like B&M or Poundland or Sainsbury's.
3. Rolling with the acquisitions
Bolting on new products and new sensible distributors into the group is a growth strategy for Supreme with many acquisitions over the last few years like Vendek, SCI-MX, Provider Distribution, Battle Snacks, or LEDHUT. Core growth and acquisition growth has generated a 14% sales cagr since 2018 and a 26% ebitda cagr with a 17% ebitda margin and a respectable 30% gross profit margin.
4. Attractive stock valuation
Sandy has built Supreme into a cash generation growth machine and buying Supreme is as much a bet on him and his growth and innovation ambitions as it is what the business is today. 13.6x P/E is not a high price to pay in that regard as Supreme is forecast to continue to grow operating profit at 10% on average over the next 3 years and that is before any earnings enhancing acquisitions.
4. SDI Group PLC. 145p share price. Down 19% in the past month and down 9% on Friday.
Market capitalisation is £148 million
Net debt position is £4 million
So enterprise valuation position is £152 million
Forward PE valuation is 21.0x, past PE valuation is 24.2x
4 reasons I think this is a great stock
1. Acquisition steamroller
SDI group is a buy and build player in complex scientific instruments and scientific technology products like astronomy cameras, thermal control systems, water purifiers or flowmeters. SDI is an acquisition machine and it does a great job under CEO Mike Creedon of picking out sustainable businesses, finding some efficiencies and putting them together as part of an overall group. The success of SDI is that it has grown sales from £8.5m in 2016 to £46m this year which is a 33% cagr, operating income by a 52% cagr in that time and EPS at a 28% cagr in that timeframe. I expect SDI to continue to close on at least 1 and maybe 5 acquisitions every year and their acquisition pipeline is stronger than any time since 2019.
2. Great margins in scientific niches
SDI buys up small businesses that operate in critical industry niches where customers are often blue chip scientific or industrial companies. Following on the theme of some of these other stocks, SDI once again has great pricing power with gross margins of 65% and operating income margins of 17%. They have two divisions called Digital Imaging and Sensors and Controls and in their last half results the operating income margins were 37% and 19%.
3. Following in the footsteps of greats
Anyone who knows SDI knows they are replicating a business strategy tried and tested, but in specific industry niches at the moment (digital imaging and sensors and controls). The tried and tested strategy is seen at rollup stocks Halma PLC, a FTSE 100 behemoth with a phenomenal track record, and AIM company Judges Scientific. Halma's share price increase since 1988 is a ridiculous 96,344%, Judges Scientific's since 2003 is a comparably disappointing 6,241%.
4. Attractive stock valuation
SDI group stock is up 1,056% since 2009. That tells you all you need to know about this long-term winner and that percentage is even more compared to 2016 when the business was starting to set out on its very new path. When you look at SDI under that microscope it is not rock bottom cheap at 21x P/E but great quality businesses never come cheap, not even in a market recession. I do not see why SDI cannot follow in the footsteps of Judges Scientific or Halma in the longer term and why this business cannot be 2x larger within only a few years. That promises sweet returns for shareholders if history is anything to judge by.
