The other day an acquaintance asked me what type of company I most like to invest in. “Well”, I replied, “some companies, like biotech and banks, are really hard to understand. Others, such as those in the media, are ‘people businesses’ – and the people can all too easily walk out of the door.
“Natural resources are high risk and basically a bit of a gamble. And technology companies operate in a world where things change very fast, and it is hard to know what rival businesses might be up to.”
“So”, I concluded, “what I really like are manufacturing businesses”.
“In the UK?” my friend interjected, with surprise. “Are you joking? Surely manufacturing is something that we are not much good at?”
Well that might have been true ten years ago. But it’s not true now. The manufacturing businesses that are left in the UK are true survivors. They have seen off a banking crisis, a global economic collapse, and years of industrial outsourcing to the East.
Many of those industrial threats are now in retreat. And that has helped spur a remarkable recovery in UK manufacturing over the last year.
That is great news for penny investors. Because these manufacturers are also wonderfully suited to penny share investing. Here’s why.
You know what you are getting with these great companies
I like visiting businesses. But too often these days this just means walking into an office full of people staring at computer screens. How can I really know what they are up to, or whether they are doing anything useful? It is really almost impossible to tell.
But when I walk into a factory where products are actually being made, I can see how it all works. I can see the raw materials, I can see the machinery, I can see the size of the factory. I can see whether the final product is any good. And the bosses of the company can normally tell me who their competitors are and how their products stack up against others on the market.
These days of course, there are not so many factories in the UK to visit. Many so-called UK manufacturing companies actually have their factories overseas, or they use third party contracted manufacturers. Or, they simply do the final assembly of parts sourced from elsewhere.
All the same, at the end of the process is something that you can see and touch. You can judge whether it is worth the price. And because the costs of manufacture are quite easy to calculate, you can also judge whether there is likely to be a decent profit margin.
And UK manufacturing is far from dead. There are some great companies out there. Take these, for example.
How an old potter came back from the dead
I’ve spoken before about some of the great UK manufacturing stocks I follow – companies that make everything from turbochargers to plane parts.
But one of my favourites is Portmeirion (LON:PMP) – a company I have been a shareholder in since 2008. The chairman is Dick Steele, who earlier this year gave us this memorable quote. “Reassuring the City,” he said, “is like waking up every morning and telling your wife you still love her”.
But when not coming up with such quips, Steele runs a manufacturing business in the presumed dead pottery industry of Stoke on Trent. And he does so with extraordinary success.
Last month Steele reported Portmeirion’s annual results. They revealed a 19% increase in revenue to £51.7m and a very healthy pre-tax profit of £5.4m. Happy shareholders received a 10% increase in the annual dividend to 17.4p. Portmeirion closed what one might have assumed to be a tough year with cash of £6.2m and no debt.
This is hardly the performance of a company in a dying industry, or one that is struggling to keep its head above water.
Some of these penny shares defy logic
In fact, Portmeirion is powering ahead. Its inoffensive designs are popular all over the world. Its famous Botanic Garden pattern alone pulls in £20m of revenue annually.
But Portmeirion’s real coup was the purchase of Spode and Royal Worcester for just £2.2m. These venerable brands were responsible for £13.5m of last year’s revenues.
“Although they are already two centuries old”, says Steele, “we consider that they still have many years of life ahead of them”.
Portmeirion defies all received wisdom about UK manufacturing. Who would believe that a small UK manufacturing company would have faithful customers in Korea?
Its Stoke-on-Trent factory is running 24 hours a day, seven days a week. It’s producing more fine earthenware than ever before. It has won success through its flexible manufacturing arrangements, using its own UK facilities as well as low cost overseas contractors, popular designs and an attentive respect for its customers.
No doubt it will be cashing in on the royal wedding. And why not? Queen Victoria herself would have been proud of this small company. It’s preserving the country’s manufacturing traditions and conquering foreign markets in fantastic style.
What’s more, it’s one of a number of great penny manufacturers that are thriving at the moment. This renaissance in UK manufacturing could be one of the investment stories of 2011. I’ll keep you updated on these great stocks as we go.
Best of luck with your investments.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
The Penny Sleuth.