The basic premise of investing is to buy into companies that are going to deliver earnings and preferably dividend growth. The important bit is trying to get in at a time when the stock’s valuation does not reflect its likely future growth. It sounds simple and sometimes it actually is.
Take a look at crane hire company Boom Logistics for example. The stock just delivered a very respectable FY12 result and provided guidance for 30+% earnings growth this year. It’s also possibly going to resume paying dividends in the back end of FY13. In terms of the valuation, the stock is trading on a PE of just 7.4X the earnings just delivered, or less than 6X management’s guidance. This is even after a substantial post-results rally.
The best bit is that Boom has a reasonable degree of certainty in its earnings. Sure, many of its customers are resource companies. But Boom’s cranes tend to provide maintenance services, so a slowdown in expansion activity isn’t a concern and neither is a dip in commodity prices. The mines using Boom’s cranes are low cost, premier league operations, not the sort of thing that gets shutdown because it’s suddenly losing money because commodity prices aren’t at record levels anymore.
The reason this opportunity exists is that Boom has been in the wilderness for a number of years. The company suffered from terrible management, which caused huge pain for its shareholders and turning the business around has taken time. But the business has now turned around and the FY12 result will no doubt be remembered as the point at which this became clear.
The reason I believe there’s still plenty of upside left is simply the fact that the market takes time to warm to a stock that has previously been a bit of a pariah. Such circumstances generally require a company to deliver a good result, back it up with another and get a few dividends under its belt before the market gets comfortable again. The problem with this is that the price of comfort is low returns.
There are of course risks to the stock. Despite its favourable client base and maintenance type exposure, a major customer could take Boom’s services in house. If this became a trend it would put a serious question mark on the future profitability of Boom’s asset base. But at a stock price of around $0.30 relative to its NTA of $0.52, you’re getting the assets at a bargain price which already factors in a significantly lower value.