Stock stories

Today’s topics

  • Stock story (Downer)
  • Stock story (Nanosonics)
  • Retail sales (expectations for next month)

Stock story (Downer)

Downer paid a little over a billion dollars to acquire the Spotless business back in 2017. It was part of a move to broaden out the groups’ core urban services offering, and, as part of the strategy, to move away from capital intensive contract mining, and low margin engineering.

Did it work? Well, we can’t know of the counterfactual (a world in which Downer didn’t do it) but we can note that the two large licks of CFI (cash from investing) didn’t seem to boost CFO (cash from operations) overmuch. That’s a lot of money, for a barely perceptible cashflow impact.

It is likewise hard to argue that the balance sheet has evolved for the better.

It is also hard to argue that there are positive network effects from the Spotless business that render intangible assets as a genuinely core driver of enhanced returns.

And so we are more inclined to look at the 7% below, rather than the 55% as a measure of the true shareholder rewards to competition.

Downer’s a well run business, and we’ve liked Grant Fenn for years. It’s a difficult industry, and Downer is often the last man standing. Consequently, they are the market leaders in a majority of segments. We’d be a little more interested with Downer in the $4’s, and as such this note is in keeping with our prior notes on IPL, QAN, other stocks that are of interest to our absolute return approach, but perhaps just outside the Core Portfolio for now.

NAN (Nanosonics)

Perhaps we’ve simply failed to see the opportunity, but NAN seem to have a lock on the ultrasound-probe-infection-control market in the US, and enjoy a sizeable chunk of global share, yet they only generate a fairly modest normalised profit.

Those modest profits are combined with a very punchy valuation, and as such, the difficult journey of replicating the US success in new markets (e.g. EMEA) doesn’t seem to quite get us there in terms of expected return. We are interested because overall the stock is of outstanding Quality (which in our parlance means would give us good exposure to the Quality factor).

Retail sales

Should be a decent negative bar at the next monthly retail sales print, one would assume, given the early banking credit card spending indicators for June.

Whilst we’ve seen negative monthly retail sales prints before, given the periodic lockdowns over the past year, we’ve not seen one in absence of the JobKeeper and JobSeeker income support measures, particularly at their prior levels of generosity.

We view this as very good reason to be cautious on consumer discretionary names across the retail space given lofty valuations and very difficult to grow from rebased earnings.

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