Yesterday following the trading statement released by Lavendon, I decided to make a fairly modest purchase within my trading account. My rationale for the purchase is laid out below:
The shares have had a rotten run over the past four to five months despite a fairly decent but marginally boring trading update in July and a fair if unexciting set of interim figures delivered on 28th August 15. A couple of firms in the equipment hire industry, HSS & Speedy Hire (SDY) have had miserable times over the period I mention but thatâ€™s to be expected as they have issued profits warnings and no such warning has been given by LVD. Maybe the lack of enthusiasm for LVD has to some extend been coloured by HSS and Speedy but a couple of other companies in the equipment hire business have been ticking over nicely, VP (VP.) and Ashtead (AHT) have been ticking over within reasonable share price limits over the period from 1/6/15:
Share price movement since 1/6/15:
LVD -32% No profit warning
HSS -73% Two profits warnings
SDY -55% Two profits warnings
AHT -11% No profits warning
VP. +7% No profits warning
Maybe this suggests that LVD has been a touch unfairly viewed since the start of June following the shaking of the sector by serial profits warnings from SDY and HSS. With this in mind I viewed the trading statement from LVD on 17/11/15 with particular interest.
So how do the numbers stack up with Lavendon and what do they look like in relation to HSS, SDY, AHT & VP.: details in the following table which uses data from Sharepad, Stockopedia and Sharelockholmes:
The Lavendon trading statement issues on 17/11/2015 was fairly upbeat and I assume much better than many expected:
"The Group's trading performance in the first nine months of the year has improved across our markets, driving growth in revenues, profitability and margins. The Board remains confident of delivering on its profit expectations for 2015, and with the delivery of the accelerated fleet investment now almost complete, we are well positioned to respond to market opportunities as we move into 2016."
All in all my view is that Lavendon has probably fallen in share price due to perception rather than actual facts in terms of the financial numbers or company performance
I also like the fact they Lavendon management are very aware of the importance of ROCE and included the comment:
In summary, the growth in overall Group revenues year to date and continued operational improvements have driven further progress in the Group's profitability and margins. The Group's ROCE has improved and remains firmly above the Group's weighted average cost of capital, albeit with the rate of year on year progress being tempered by the previously announced increased fleet investment of Â£20 million in the final months of this year.
In terms of my expectation or target, letâ€™s say a gradual improvement or rerating of the PE to around 10 would give an appreciation of 20-25% in the SP so I will set a target of 170 for review and at the same time hopefully enjoy a decent well covered yield of 3.7%. At the same time I am mindful that the Speedy Hire have rallied over 20% in the past 7 trading days.
On the downside I will set a stop loss at 115p.
As ever, this is not in any way a recommendation but simply the sharing of my reasoning for making the purchase and my reasoning does not always guarantee me success.
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