Although painful, last week’s dark clouds on equity markets have at least revealed some silver linings. Due to panic selling by hedge funds many quality stocks unrelated to US subprime problems are now popping up on value investors’ radar screens. This ‘en masse’ exit from stocks underlines another major investment rule: avoid becoming a distressed seller. Being forced prematurely to offload excellent stocks at rock-bottom prices is clearly not a sensible strategy for making money.
Tip of the week: Vislink (VLK), tipped as a BUY by Evolution Securities
When it comes to technology, I’ve experienced two ‘wow’ moments over the past three years. The first was upgrading my home internet connection to broadband in 2004; the most recent was watching a high-definition (HD) film on a 40-inch plasma screen. The picture was razor sharp, yet the HD-ready TV cost only around £1,000. I’m convinced this will become a mass-market product in the medium term. External research also supports this view; analysts expect that globally the number of HD homes will treble by 2011, from the estimated 50 million in 2006 – representing an average growth rate of more than 25% a year.
To satisfy this huge demand, broadcasters will need to change over from standard-definition to HD. The higher levels of picture quality delivered by HD mean more data need to be captured, encoded, edited and then transmitted. Hence all old standard-definition equipment will have to be replaced. Meanwhile, the launch of hundreds of new digital channels is generating an explosion of new content.
So how can we ride this technology boom? Vislink looks an attractive play. It designs and manufactures the satellite and radio equipment (85% of sales) used in the broadcast industry. Its top products include wireless TV cameras, antennae, satellite uplinks and encoders/modulators, which allow the data generated by HD pictures to be transmitted wirelessly. In 2006, Vislink provided live HD coverage of the Winter Olympics and the World Cup finals. Customers include major international broadcasters, such as the BBC, Sky News and Reuters, as well as equipment-hire firms. Vislink also supplies this advanced kit to the police and armed forces in the UK and US, who use the digital systems in helicopter pursuits, among other things.
The remaining 15% of revenues is generated from sales of explosion-proof CCTV equipment to the marine industry. This business is benefiting from the high oil price, which has driven demand for off-shore exploration. City analysts expect 2007 sales and underlying earnings per share of £101m and 6.7p respectively. Although revenues will be held back by the ending in 2008 of a large US rechannelisation project, the shares trade on an undemanding p/e ratio of 10.5, falling to ten in 2008. The balance sheet is also robust, with net cash of £3.9m as at December.
Before reporting interim results on 30 August, the group released an encouraging trading update on 25 July. It said it was on track in the first half to meet City hopes, despite headwinds from a weakening dollar, and “remains confident for the full year”.
So what do we need to watch out for? Undoubtedly, a prolonged downturn in the broadcast sector would affect performance, but the move towards HD looks compelling. Additional risks include price competition and fluctuating exchange rates, as around 80% of turnover is derived outside of Europe. Nonetheless, the shares look cheap for this hi-tech stock.
Recommendation: BUY at 71p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments