Judges Scientific has mastered the sometimes underappreciated art of buying and building. For the past 18 years, it has been acquiring manufacturers of scientific instruments, helping them to reach their full potential, then using the proceeds to repay borrowing and repeat the process. The results have been impressive.
It’s a fairly straightforward strategy. Identify businesses with little to no competition and high barriers to entry that perhaps lack commercial nous and sufficient access to capital; buy them at about five times earnings before interest and tax (ebit), with a mixture of shares and borrowed money; then provide them with the right environment to flourish. Existing bosses are kept on to run the company. Judges basically acts as a partner, providing financial support as well as methods to optimise revenues and save on costs.
Excellent execution is reflected in the numbers. Since 2005, the group has consistently delivered high returns on investments, stellar profit margins, plenty of organic revenue growth and lots of free cashflow. Investors grew wise to this in about 2018 and since then have pushed up the shares a whopping 340 per cent. The question now is whether this Aim-listed growth stock has reached its ceiling or has more to come.
The outlook looks quite promising. Judges has proved to be a dab hand at acquiring companies on the cheap and getting the best out of them. Last year, it bought Geotek for £80 million, or seven times ebit, significantly more than it usually spends on acquisitions.
Meanwhile, global demand for higher education and product optimisation, key revenue drivers, should continue to rise. Questions about whether this business model is sustainable can be put to bed, too; Halma’s adoption of a similar strategy turned it into a FTSE 100 group worth about £8.5 billion.
The market appears to have recognised this, pushing the shares to record highs and a forward price-to-earnings multiple of 26 times. To continue rising from here, some reassurances are needed. First, there’s the question of size. As Judges grows, it needs to do bigger deals, which change the risk profile and have a habit of squeezing returns. Asking prices tend to be steeper, more money must be borrowed and more eggs are put into one basket.
Another concern is that David Cicurel, Judges’ founder, chief executive, dealmaker and major shareholder, is now in his seventies. The group has been preparing for life without its charismatic leader and has hired a few well-qualified executives from the likes of Halma and Renishaw. Nevertheless, it’s natural to assume that Cicurel’s eventual retirement will hurt sentiment and create uncertainty.
The economic environment is a worry. Soaring interest rates and a strong pound aren’t ideal for a big borrower that generates about 85 per cent of sales overseas. And customers could grow frugal. Judges’ portfolio of companies is diverse and some revenue streams are backed by regulation and are very defensive. The main source of income, university research, is tied closely to government spending and the group does a lot of business with industrials, which can cut capital expenditure at the first sign of trouble. The fixed-cost base is high, as well.
Do these risks mean Judges no longer deserves the kind of rating usually reserved for high-quality growth stocks? Probably not. The scientific instruments group has emerged from bigger challenges relatively unscathed and has a track record that makes it hard to bet against. The so-called buy-and-build model created some of Britain’s finest companies. And Judges is one of the best at executing this strategy.
ADVICE Hold
WHY Should continue to deliver value to shareholders
Hays
Economic uncertainty is bad for recruitment agencies. When companies don’t know what’s around the corner, they’re more likely to freeze wages and stop hiring. It’s little wonder, then, that Hays’ share price has dropped 19 per cent over the past year.
The FTSE 250 constituent’s numbers are yet to fully reflect this sense of gloom. In the three months to June 30, a growing presence in specialist, in-demand sectors, a moderate appetite for temporary jobs and rising wages — the group gets a percentage of the salary paid to the people it puts in work — helped to save Hays’ blushes.
The word “resilient” has been thrown around a lot. However, the heavy punches have yet to be thrown. Soaring interest rates eventually should have the desired effect of taming inflation and causing the labour market to unravel.
However, not all investors are running for cover. Moves to cut headcount and adjust the cost base in preparation of economic turmoil have proved reassuring, as has news that there’s £35 million of surplus net cash beyond its £100 million buffer.
Hays has also been lauded for possessing greater defensive characteristics than its peers.
More than half its fees come from temporary placements, which tend to be the preferred option for employers in times of economic uncertainty, and professions facing skill shortages. The recruiter has a big presence in technology, accounting and financing, engineering and the green economy, areas where vacancies generally are plentiful and wages are higher.
Those positive traits have not been enough to stop the shares sliding. They trade on 13 times forecast earnings, which is about 28 per cent below their long-running average and a similar price to what its historically less resilient peers, PageGroup and Robert Walters, fetch.
That doesn’t necessarily mean you should bite, though. As things stand, buying a stock whose fortunes are closely tied to the health of the economy doesn’t feel like a very appealing option. To overlook that, an even bigger discount is probably warranted.
ADVICE Hold
WHY Discount seems fair, given where we are in the economic cycle
