If you’re hunting for a small-cap stock with robust barriers to entry, plenty of overseas potential and minimal exposure to the ailing public sector, look no further than Murgitroyd.
Murgitroyd is one of Britain’s largest intellectual property (IP) lawyers, employing 210 staff, of which around 65 are professionally qualified attorneys. The firm specialises in filing, defending and renewing patents, trademarks and designs for a wide spectrum of customers, ranging from large multinationals to individual inventors. These services span engineering, electronics, chemistry and biotechnology. So there is no big exposure to any one client or industry, and little reliance on dwindling government budgets.
While the IP market dipped in 2009 as firms pulled in the purse strings, the sector is still set to expand at mid-single-digit rates. This will be driven by greater research and development (R&D) investment, together with a growing number of patent disputes between patent owners and copycat rivals.
Currently, Britain is Murgitroyd’s biggest earner, accounting for 89% of revenues, but the board is ramping up its presence in continental Europe, America and Japan. Longer term this should provide a boost and act as a hedge if sterling continues to decline.
Murgitroyd (Aim: MUR)
House broker Brewin Dolphin reckons turnover for the year ending May 2010 will come in at £29.5m, with underlying EPS of 28.2p, rising to £30.7m and 29.9p respectively in 2011. That puts the stock on meagre p/e ratios of 9.6 and 9.0. It pays a healthy 10p dividend, equating to a 4% yield. I would value the group on ten-times operating profit. After adjusting for the estimated £6m of net debt, that generates an intrinsic worth of about £3.50 per share.
So what are the wild cards? It’s possible R&D budgets may be slashed under a double-dip scenario, although I suspect this is unlikely as it would amount to commercial suicide for the firm’s customers. Fees for patent lawyers will continue to be scrutinised as clients remain price sensitive. There is also a chance of a fund-raising round, given Murgitroyd’s acquisitive history. That said, protecting IP is vital in most economies and such stocks should continue to do well. Brewin has a 330p price target and preliminary results are due out on 6 September.
Recommendation: BUY at 270p (market cap £23m)