Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Luke Newman, fund manager, F&C Special Situations Fund
The defence industry has seen several periods of consolidation, notably under Reagan when the end of the Cold War put the brakes on the US defence budget. This meant US contractors had to turn acquisitive to expand. With pressure on the US defence budget today, further consolidation could take place. I’ve taken a new position in Ultra Electronics (ULE), which designs, makes and supports electronic and electromechanical systems and products for defence, security and aerospace applications. Ultra has consistently achieved more than 10% growth in profits and cash flow over the past decade. This should continue given the critical nature of its products and its high level of intellectual property. I prefer to invest in suppliers rather than prime contractors in this sector given the potential for higher returns and growth and the likelihood of mergers and acquisitions.
I’ve followed Aga Foodservice (AGA) for many years. It can be split into two distinct businesses. The first is aimed at the consumer, comprising Aga cookers and the high-end tile and home-design specialist, Fired Earth. The second is a food services unit, supplying commercial markets with cooking, refrigeration and baking equipment. In a more competitive market the latter is less profitable and a sale looks increasingly likely. Having seen private-equity interest in this area in the past, I would expect Aga to achieve an attractive price. This would leave the consumer business looking tempting on a valuation basis and inefficient in terms of its capital structure and under-geared balance sheet. Aga is currently seen as an engineer, but I would say it is more similar to the luxury goods firms, having increased volumes on the consumer side throughout previous consumer slowdowns. In any case, it looks anomalous against both sectors. After buying in at 415p last week, I have a share price target of 500p. The growth in eating-out in the UK, from fast food to fine dining, has boosted several stocks over the past year – not least Clapham House (CPH). The company looks well positioned to grow, mainly through its Gourmet Burger Kitchen brand. Gourmet Burger Kitchen has been a success story inside the M25 and the group is eager to roll out the franchise across the UK. I have confidence in the management’s ability to do this, having overseen the growth of Pizza Express from one store to 350. Current City expectations are for only 100 additional stores over the next four years, but if Pizza Express is any guide, this may be conservative.
In the pharmaceutical sector, where US regulatory approval for new drugs is increasingly hard to come by, UK-listed Shire (SHP) stands out. Under current chief executive Matt Emmens, Shire has been spending cash on plugging holes in its drug pipeline through joint ventures and the licensing of consumer products. Three years ago its key drug, Adderall (used to treat attention deficit disorder in children), was coming off patent, but Shire has licenced and acquired a new drug, which users of Adderall are likely to switch to. The new drug addresses some US concerns about the misuse of such drugs, particularly as most sufferers are children. In a sector where large firms are struggling to fill holes in their own pipelines, despite being well capitalised, I am more comfortable with Shire. The company has a number of Phase III and late Phase II drugs under development, which should ensure a robust business model.
The stocks Luke Newman likes
12mth high, 12mth low, Now
Ultra Electronics, 1,278p, 966p, 1,165p
Aga Foodservice, 444.75p, 350p, 434.75p
Clapham House, 422p, 202p, 380p
Shire, 1,255p, 795.5p, 1,231p