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Fundamental analysis
How a stock's market cap impacts returns – Campbell Brothers
July 10, 2008
Tim Lincoln, managing director of Lincoln Indicators
Company: Campbell Brothers Limited
ASX Code: CPB
Current Share Price: $27.00
1 Year High/Low: $36.00/$22.39
This week Tim Lincoln profiles Campbell Brothers Limited (CPB) and illustrates the importance of considering a stock’s market capitalisation when assessing a potential investment opportunity.
Campbell Brothers Limited (CPB)
Operations
Campbell Brothers Limited (CPB) is involved in the provision of sales and marketing services to grocery manufacturers and retailers, distribution of consumer and industrial goods and the provision of analytical laboratory services. The company operates in Australia, New Zealand, Asia, Americas, and the Pacific.
Investment Opinion
CPB is potentially an attractive investment option given its consistently strong performance in the past few years and its positive earnings outlook. The company has posted a three year average EPS growth rate of 39.17% p.a. and a three year total investor return of 48.74% p.a. Demand for the company’s various services are expected to remain high, in particular, the laboratory services division which has been the main profit contributor. CPB’s recent acquisitions and plans to further diversify into new markets will strengthen its position in the industry and may generate long-term growth for shareholders.
Financials
CPB has regained its status as a Consistently Healthy Star Stock following analysis of the company's latest annual results. The company is in a Strong position of Financial Health. Whilst it has weakness on its Balance Sheet, this is offset by strength on the company's Profit and Loss and Cash Flow statement, resulting in a manageable level of financial risk. Net operating profit before tax and significant items rose by 52.3% to $101.982 million for the period 1 April 2007 to 31 March 2008 from $66.945 million in the previous corresponding period, driven by another excellent performance by the ALS Laboratory Group. Buoyant markets and strategic acquisitions allowed the division to offset the adverse impact of a stronger Australian dollar on the translation of offshore earnings. The company also benefited from an improved contribution from the chemical division, reflecting the success of cost-control initiatives implemented in the previous financial year. Pre abnormals EPS increased 36.90% from 100.17 cents to 137.13 cents. ROA improved by 15.98% from 12.98% to 15.05%.
Valuation
The company last closed at $27.00 at a PE of 19.69 times, which when compared to the Commercial Services and Supplies sector average of 10.73 times, suggests the company is potentially overvalued at current prices. However, the PEG of 0.53 suggests that the premium being paid by the market on the company's earnings may be justified when the current rate of EPS growth is considered.
Outlook
The outlook for CPB is positive with further growth forecast for FY09. CPB will continue to focus its attention on ALS, which has a genuine competitive advantage and proven business model. According to management, market conditions for ALS are forecast to remain buoyant for the next few years, particularly for minerals analysis. Furthermore, a new divisional structure will allow ALS to better capitalise on its competitive advantage and proven business model to seize opportunities in the analytical and testing industry. ALS would continue to expand through acquisitions, new laboratories and increasing its share of high-growth markets such as Russia, China and India. According to consensus analyst estimates, CPB is forecast to report a 24.12% increase in EPS to 170.20 cents for FY09. This will see the company trade at a PE ratio of 15.86 times and a PEG ratio of 0.66, an undervalued position.
Why is a company’s market capitalisation important?
A company’s market capitalisation is the total dollar value of all issued shares. Traditionally, companies with larger market capitalisations tend to experience less volatility in share price than stocks with smaller market capitalisations.
It is important to consider what size stocks suit your portfolio given your risk profile.
In our example above, CPB is considered a large cap company with a market capitalisation of $1,407.688 million.
Since hitting an all time high of 6853.6 on 1 November 2007, the All Ordinaries Index has fallen 23.96%*. CPB has fallen just 21.28% in the same period. It is important to note that financially healthy, undervalued companies with strong earnings outlooks tend to be more resilient in volatile market conditions and are often the first to bounce back once investor sentiment is restored.
Tim Lincoln is Managing Director of Lincoln, Australia's premier fundamental analysis research house and fund manager offering intelligent sharemarket solutions for the conscientious investor. Click here to register to receive Star Gazing – Lincoln's Fortnightly Stock Tip.
Important information:
All Ordinaries Index: 1/11/2007 - 6853.6 (all time high), 10/4/2008 – 5515.5. Source: Stock Doctor® and www.asx.com.au.
Author: Tim Lincoln. Lincoln Indicators Pty Ltd ACN 006 715 573 (Lincoln) AFSL 237740.
This information is current as at 02 July 2008.
Our advice and the advice of our Authorised Representatives (including advice in this communication) are prepared without taking into account your personal circumstances.
You should therefore consider the appropriateness of the advice in light of your objections, financial situation and needs, before acting on it. Where our advice relates to the acquisition or possible acquisition of a managed fund, you should obtain a copy of and consider the Product Disclosure Statement before making any decision. Investments can go up and down. Past performance is not a reliable indicator of future performance.
Our analysis and advice is impacted by AIFRS. Please refer to our website for further information: www.lincolnindicators.com.au/AIFRS. Testimonials are provided by third parties for information purposes only and are not intended to be financial product advice. They do not represent opinion or advice from Lincoln. The information provided may not be appropriate to your particular circumstances. You should consider obtaining your own independent advice before making any decision.
Lincoln, its director, employees and agents, makes no representation and gives no warranty as to the accuracy of this communication and does not accept any responsibility for any errors or inaccuracies in or omissions from this communication (whether negligent or otherwise) and shall not be liable for any loss or damage howsoever arising as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this communication as it does not purport to be comprehensive or to render advice. This disclaimer does not purport to exclude any warranties implied by law which may not be lawfully excluded.
Economic and other information taken into account in forming any opinions are subject to change and therefore opinions expressed as to future matters may no longer be reliable.
More articles from this edition of CompareShares:
Stocks: Comeback stocks – unearthing value
Fundamental analysis: How a stocks market cap impacts returns – Campbell Brothers
Superannuation: Disastrous retirement strategies
Stocks: Wall St tumbles as Dow loses 230 points
Recession: Consumers in 'recession-like' gloom
Companies: Germans urge EU to reject BHP/Rio merger
Interest rate: RBA must act quickly on rates: IMF
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