Benjamin Graham is seen as the founding father of value investing. One of his core principles was to buy stocks priced at, or below, their net current assets. This is a rarity, particularly in the industrial sector, as it means a business must be trading at less than its cash and working capital balances, after deducting all liabilities and counting fixed assets as zero.
But I’ve found one. It is Britain’s largest maker of machine tools (such as lathes) that are used for cutting metals. It also makes specialist laser-marking equipment (accounting for about 10% of turnover), whose faster growth is being driven by the need for traceability, anti-counterfeiting measures and tighter environmental legislation. Its machines etch unique identifiers on to cars, for example, to help customers ensure their parts come from recognised sources.
600 Group (SIXH): SPECULATIVE BUY at 32.5p (market cap £18.6m)
Last week, 600 Group reported like-for-like revenues up 8% to £78.9m, delivering underlying earnings per share (EPS) of 4.3p and beating City hopes despite one-off costs and dollar depreciation. The firm entered this year with a healthy order book, including a major aerospace contract. But the board also warned of more challenging conditions ahead, with the “rate of growth in the machine tool market nearing its peak in the current cycle”. The group is making redundancies, aiming to achieve savings of £2.1m a year, at an estimated one-off cost of £0.9m.
House broker Altium has cut its EPS target for the year ending March 2009 to 2.6p, putting the shares on a sector p/e multiple of 13. But this ignores 600’s substantial asset base. As at 29 March 2008, the group had net cash, current assets and tangible assets of £3.2m, £21m (worth 36p per share) and £35m (or 61p) respectively. This is a buying opportunity – and indeed, the board rebuffed a takeover approach from Precision Technologies in October.
Of course, there are risks. As a relatively small operator, it may be squeezed by larger rivals. And a severe slump in the world economy would hit demand for its products. But with a solid order book and a healthy cash position, the stock offers more up than downside. It could become the target of another bid.
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments