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Stock picks
Seeking stocks in high growth sectors – Fleetwood Corporation
July 24, 2008
Tim Lincoln, managing director of Lincoln Indicators
Company: Fleetwood Corporation Limited
ASX Code: FWD
Current Share Price: $8.45
1 Year High/Low: $11.59/$8.01
This week Tim Lincoln profiles Fleetwood Corporation Limited (FWD), and illustrates the importance of assessing management performance when considering a potential investment opportunity.
Fleetwood Corporation Limited (FWD)
Operations
Fleetwood Corporation Ltd (FWD) commenced business in 1964 with the company’s operations originally based around the sale of caravans and caravan accessories. The group has since expanded its activities to include the operation of caravan parks and the manufacture of park homes. The company currently has two key divisions: recreational vehicles and manufactured accommodation.
Investment Opinion
FWD may present an attractive investment opportunity given that the company operates in three of Australia’s fastest growing industry sectors: retirement, resource development and recreation. FWD has grown steadily, delivering two year average EPS growth of 19.44% p.a. This trend is likely to be maintained in the coming years given positive developments for the company. FWD was recently awarded a $48 million contract for a 1,040 room village by Worsley Alumina. The contract is to be increased to 1,350 rooms and will underpin revenue growth next year.
Financials
FWD has retained its status as a Consistently Healthy Star Stock following analysis of the company's FY08 interim results. The company remains in a Strong position of Financial Health with strength across its Balance Sheet, Profit and Loss and Cash Flow statements. Hence, financial risk is deemed to be manageable. Net operating profit before tax and significant items rose by 24.9% to $22.862 million for the period 1 July to 31 December 2007 from $18.302 million in the previous corresponding period. It is also worth noting that FWD was able to increase its margins despite the challenges of higher costs and a shortage of labour. Return on Assets (ROA) increased from 20.10% to 22.74% while pre abnormal Earnings per Share (EPS) rose by 19.62% to 31.10 cents.
Valuation
The company last closed at $8.45 at a PE of 14.44 times, which when compared to the sector average of 8.14 times, suggests the company is potentially overvalued at current prices. However, a PEG of 0.74 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 FWD is positive. In the company’s FY08 interim report, management stated that while it expected labour availability to remain a challenge, an improved performance by the recreational vehicles division is expected in the second half of FY08. The Manufactured Accommodation division continues to benefit from the expansion of its manufacturing facilities and the strategic investment in the Searipple accommodation village. The company is also set to benefit from the continued strengthening of the resource sector. Consensus analyst estimates expect a 22.66% increase in earnings for the full year FY08 to 65.50 cents per share. This would see the company trade at a forecast PE ratio of 13.07 times and a PEG ratio of 0.57, maintaining its undervalued position.
Why is management assessment important?
Once you’ve established a company is in a solid position of Financial Health, it is important to assess the ability of the company’s management team to grow the business.
How is management assessed?
A company’s Return on Assets (ROA) is considered to be the strongest correlating factor to share price appreciation. Lincoln identifies a quality management team as one which has achieved ROA of greater than 8% p.a. on an improving trend. If you consider that the ‘risk free’ rate of return is currently around 6.5% p.a., we look for a management team that can utilise the assets of the business to achieve ROA of greater than 8% p.a.
FWD’s management team has performed exceptionally well achieving annualised Return on Assets (ROA) of 22.74% for the first half of FY08.
FWD displays the signs of a quality management team through their ability to take advantage of the growing demand for mobile accommodation as a result of the mining boom in WA and the increasing number of baby boomers purchasing recreational vehicles once they enter retirement. The company has achieved an upward trend in ROA over the past two years.
With the recent sharemarket volatility, FWD’s share price has been quite resilient, falling just 9.14% in the last six months compared to the All Ordinaries Index which has fallen 15.73%* in the same period. With the company’s strong growth profile and earnings outlook, FWD’s management team is expected to continue delivering outstanding ROA results.
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: 16/1/2008 – 5870.80, 16/7/2008 – 4,947.50. 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 16 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: Share portfolio killers – stocks to avoid in this climate
Stock picks: Seeking stocks in high growth sectors – Fleetwood Corporation
Investing: Picking up blue chip bargains for the long haul – the pick of income and growth stocks
Economics: The recession we don’t have to have
Advisor Lounge: How to calculate tax payable on share gains and losses, and when are you classed as a share trader by the Tax Office?
Inflation: Annual inflation rate up to 4.5%
Property: Rents rise up to 25% in past year: poll
Companies: Comm Bank working to acquire ABN Amro
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