3 fallen angels

Everywhere on the stock market, one can find stocks that have fallen from their peak valuations. It’s always the dilemma for investors: does this represent a bargain, or has it happened for a very good reason? Here is another group of stocks where a good case can be made for the former.

WiseTech Global (WTC, $9.53)

Market capitalisation: $2.8 billion
FY19 forecast yield: 0.4%, unfranked
Analysts’ consensus target price: $11.39

Source: nabtrade

One of Australia’s true tech star stocks, WiseTech Global provides cloud-based software solutions to the logistics industry worldwide. The stock floated in April 2016, with 16% of the capital sold at $3.35, and saw virtually one-way traffic in terms of share price, surging to levels above $16 earlier this year, until WTC began to feel the effects of gravity.

WiseTech’s speciality is logistics management software: it is based around its integrated global logistics platform CargoWise One, which allows logistics service providers to execute complex transactions in areas such as freight forwarding, customs clearance, warehousing, shipping, land transport and cross-border compliance. On top of that, WiseTech has been a very aggressive acquirer of businesses in its time on the stock market, as it builds out what founder, chief executive and largest shareholder Richard White says is its ambition to “be the operating system for global logistics.”

The pattern has been buying specialist software providers in non-English-speaking countries where WiseTech feels that organic growth might take too long, and buying what it calls “adjacencies” to its core logistics software platform, for example land transport and cold storage providers.

The stock market seemed to start to worry about the company’s level of acquisitions. It’s the classic dilemma for analysts and investors: are all the acquisitions coming at the expense of organic growth, and can they be integrated successfully? Are the acquisitions driving revenue growth?

These concerns came to a head in February, when Wise Tech reported its interim (half-year) results. WiseTech reported revenue growth of 31% to $93.4 million for the December half, including $4 million from acquired businesses. EBITDA (earnings before interest, tax, depreciation and amortisation) jumped 32%, to $31.8 million, flowing into an 8% rise in net profit, to $15.6 million.

WiseTech also restated its full-year guidance for revenue growth of 35%–41%, which would come in at $207 million–$217 million, and EBITDA growth in the 32%–39% range, implying $71 million–$75 million. But the stock was hammered, losing close to 22%, to $11.47. The problem: the revenue growth appeared to rely too much on acquisitions, and there wasn’t an upgrade to net profit guidance.

The good news is the recent share price fall has opened up a bit of value for longer-term investors, if they can accept the WiseTech case that its acquisition strategy really will, as it says, build a “very powerful global ecosystem,” that helps its global customers to improve their productivity. In the meantime, WiseTech is not really a dividend yield proposition.

Australia doesn’t have many global tech leaders – but this is one of them. And it is a lot more attractively priced now than it was a few months ago.

Compumedics (CMP, 32 cents)

Market capitalisation: $57 million
FY19 forecast yield: n/a
Analysts’ consensus target price: 75.4 cents

Source: nabtrade

Medical devices company Compumedics is arguably another Australian global leader: the company develops, manufactures and commercialises diagnostics technology for sleep, brain and ultrasonic blood-flow monitoring applications, working to diagnose sleep and neurological disorders.

Compumedics is the number one sleep and neurological diagnostics device supplier in the Australian market, the number one sleep diagnostics device supplier in the Japanese market, the leading supplier in China, to “premier facilities,” of sleep diagnostic devices and trans-cranial Doppler (TCD) devices, which monitor blood flow to the brain ultra-sonically. In the US market, Compumedics says it is the number-three sleep diagnostic device supplier, and is number three in the neurological monitoring devices market.

Compumedics has two overseas subsidiaries, the US-based Neuroscan and DWL in Germany. Its products are sold in the Americas, Australia and Asia-Pacific, Europe and the Middle East. The company has a well-diversified revenue composition.

From levels close to 90 cents in November 2016, Compumedics’ share price started to slip as the market did not feel that adequate financial results were flowing from its broad global reach and multiple revenue streams. Revenue and earnings dropped in 2017 and the company had to restructure its management and sales force in the US. But after a share price slump of close to two-thirds, CPU is finally re-emerging as a growth story.

In February, the company announced record sales orders of $18.5 million for the December 2017 half-year, including the largest system contract in the company’s history, a $4.9 million contract that will see Compumedics supply its state-of-the-art magnetoencephalography (MEG) imaging system to the world-renowned Barrow Neurological Institute (BNI) in the second half of 2018. This contract opens up a pathway to the multi-billion-dollar brain imaging market for Compumedics. The company’s sales orders received, but not shipped, figure at 31 December 2017 was $6.5 million, more than double the figures at 31 December 2016, indicating strong revenue growth in the second half. US business sales orders were 49% higher than a year earlier, indicating that the company has largely fixed the problems in that business.

Compumedics’ full-year guidance is for revenue of $40 million-$42 million – compared to $34.4 million in FY17 – EBITDA of $5.5 million-$6.5 million (against $2.8 million in FY17) and net profit of about $4.4 million, which would represent earnings per share (EPS) of about 2.5 cents. If borne out, that would be a very strong turnaround by the company – which is nowhere near yet reflected in the share price.

Baby Bunting (BBN, $1.27)

Market capitalisation: $160 million
FY19 forecast yield: 6.5%, fully franked
Analysts’ consensus target price: $1.69 (Thomson Reuters)

Source: nabtrade

Lastly, a fallen retail star that is leading the consolidation of its industry, but which has been caught up in the fear of the depredations that Amazon might make across the retail industry. Baby Bunting operates in the $2.4 billion Australian baby goods market, selling prams, cots and nursery furniture, car safety products, toys, babywear, feeding products, nappies, linen and associated accessories. After listing in October 2015 at $1.40 a share, Baby Bunting more than doubled its float price inside a year, as it beat its prospectus sales and earnings forecasts. The chain was also helped by the collapse of its major competitor at the time, My Baby Warehouse, which gave Baby Bunting a dominant position in the highly fragmented market.

But things started to slip after that, as aggressive discounting hit the baby goods sector, and there were problems with supply of major items, such as car seats. In November 2017, this discounting caused the company to slash its profit guidance, and all of a sudden, Baby Bunting was back below its listing price – with the Amazon fear also casting a shadow over the stock, given that Amazon is a major player in the baby goods category in the US.

Baby Bunting reported a one-third fall in net profit for the December 2017 half-year, to $3.48 million. Total sales for the first half were up 9.8% to $148.3 million, but comparable store sales (that is, excluding new store openings) actually fell by 1.7%. However, the company said that comparable store sales during the first six weeks of the current half had risen by 4.5%, and Baby Bunting stuck to its (already lowered) full-year earnings guidance, which expects EBITDA to be about $23 million in FY18, roughly the same as in FY17.

It was a poor result, and the share price – after an initial bounce – has slid a further 15% since it was released, taking the decline in BBN from its peak to 60%. But that fall now brings BBN well into value territory, premised on several things: that the second-half recovery continues, that Baby Bunting can capitalise on the closure of competitor Babies R Us, that new pram ranges are a hit in the market, that the restocking of car seats is complete (and this problem will not recur) and most importantly, that Amazon Prime (and even eBay) does not eat into the company’s market share too much.

Baby Bunting says it expects to be cheaper than Amazon for about half its product range, and that more than half its top 250 selling goods are subject to Australian mandatory safety standards, which Amazon Prime may not be able to match. If the baby products market has stabilised and the company is right about its ability to hold its market in the face of competition, on analysts’ consensus earnings and dividend expectations, Baby Bunting is both good value and offering a very attractive fully franked dividend yield.