TED sold, TSTL bought

I sold my holding in Ted Baker for an 8% loss, following publication of their latest results.

ted baker

The results themselves seem more or less in line with expectations. However, the tone of the outlook statement is not as positive as I was hoping for:

Trading across our markets continues to be impacted by on-going external factors. We have a clear strategy for the continued expansion of Ted Baker as a global lifestyle brand across both established and newer markets. This is underpinned by our controlled distribution across channels as well as the design, quality and attention to detail that are at the core of everything we do.

While this may seem fairly innocuous, I am concerned that it is quite negative compared to last year’s statement. What particularly concerns me is the lack of reference to current trading except to say it is impacted by ongoing factors. Last year’s outlook:

We are pleased by the initial reaction to our Spring/Summer collections, which has been positive. Trading is in line with our expectations, with the exception of Asia […] The strength of the Ted Baker brand and collections support our confidence in the continued development of the brand and further growth of the business, however, we remain mindful of the economic and political uncertainties in some of our markets.

The market has reacted negatively with the shares about 5% down. This has also broken the previous uptrend and momentum doesn’t look great. Overall, while it doesn’t look like anything too bad is happening, I feel that there are too many red flags about Ted Baker’s medium term performance to continue holding. Long term I think the business is great though and will look to buy in when things are looking more positive (and potentially when the price is cheaper). Ted Baker goes back to the watchlist for now.

With some of the proceeds I have topped up my holding in Treatt taking it to 2.5% of the portfolio and my holding in Craneware to 5.2%. I am warming more to Treatt now after considering how I might score it for the watchlist spreadsheet. I was already warm to Craneware which has just announced a large contract win.

tristel

Tristel bought

With the remainder I have bought a new holding in Tristel (1.8% of the portfolio).

Following my new approach I’m going to explain why I bought this share rather than alternatives from my shortlist. The top ranking shares in my spreadsheet were Tristel, Nichols, Just Eat and JD Sports:

  • Tristel I think looks like a good defensive business on a bit of a roll and where the valuation is quite reasonable. I’ll explain in more detail below.
  • Nichols looks like an excellent quality share. However, my main concern is currently its demanding valuation given its rather unexciting likely growth rate.
  • Just Eat I find quite attractive. It has just published excellent results and seems to have great growth prospects internationally. Its business model has great economics and I think it may have a durable competitive advantage. My reason for not buying is just that I marginally prefer Tristel. The Just Eat CEO is leaving due to family matters which may present a risk and the share price has been a bit erratic recently because of this.
  • JD Sports is one that looks great on paper with awesome numbers, great share price momentum and an apparently reasonable valuation. I have watched it motor away as on my watchlist for a number of years now. I should avoid being put off by the fact I missed the earlier opportunities to buy it. However, I have some concerns about the sustainability of its competitive advantage and its future growth prospects – I have updated the spreadsheet scores to reflect these concerns more fully. I am tempted to eliminate it from the watchlist but I’m going to keep it for the time being.

So on to Tristel…

Quality

Tristel is a manufacturer of high grade cleaning products for hospitals and veterinarians. I think it is a high quality business:

  • Business economics: Tristel has good economics. It currently has high margins (20%) and returns on capital (26%). These haven’t always been this high but have been growing in the last 3 years. Tristel also has consistently high free cash flow conversion.
  • Track record: the track record is somewhat patchy with some mild profit warnings, volatility in sales growth and consequently the share price over the last few years. However, overall I’d say the performance has been good and profits and revenues have grown at a high rate. Given it is a small cap niche manufacturer I think some volatility is to be expected. I might need to bear this in mind when considering whether to sell this one.
  • Competitive advantage: Tristel appears to have a strong competitive advantage. It has IP over its products. There seems to be some evidence from studies that its products are superior in quality to alternatives available. Its main customers are hospitals who are slow to switch suppliers. This can make it take longer for Tristel to win new customers but also means it is less likely to lose them too.
  • Growth prospects: there appears to be plenty of scope for Tristel to grow into several large addressable markets globally. It is currently planning to expand into the US hospital market.

Pricing

Tristel’s recent interim results were ahead of expectations. Its share price momentum has subsequently been very strong. My simple discounted cash flow model suggests Tristel’s current valuation implies a medium term growth rate of about 10%. I think this seems eminently achievable suggesting that Tristel is somewhat undervalued.

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