I must admit to being slightly puzzled as to why the shares in this company have been treated so harshly by the stockmarket. It’s not as if they were outrageously expensive and pricing in lots of profit growth.
It’s true that its two main businesses are pretty dull and unexciting. Delivering newspapers and magazines to newsagents (distribution) is not glamorous and is a declining business. Yet, it has been good at controlling costs in this activity, while it generates lots of surplus cash to pay dividends.
The hopes for growth lie with the company’s aviation division – moving bags and cargo on and off aeroplanes. Although a little dull, this business has been steadily getting bigger over the years as John Menzies (LSE: MNZS) has won more contracts and bought up smaller competitors.
I tipped shares in John Menzies as a buy back in July last year, when they were just over 700p. It has not worked out well. The shares are down over a third so far this year and are hovering just above their 52-week low.
It seems to have hit a bit of a sticky patch recently. The cargo side of the business is doing well, but lots of airlines are asking for lower prices for baggage handling and this is putting pressure on profits. Throw in some operational difficulties at Heathrow airport and profits probably won’t grow this year.
The other possible issue weighing on the shares is a change in management. Craig Smyth, who is credited with doing a very good job in building up the aviation business, is leaving and being replaced by Jeremy Stafford, who comes from problem UK company Serco.
This has certainly raised a few eyebrows in the City. But are things really so bad as to justify the share-price pummelling that has gone on? I’m not sure.
Distribution profits should continue to hold steady for a while yet. In aviation, John Menzies is winning new contracts and getting rid of unprofitable ones – the quality of this business is going up. With lots more outsourcing happening across the world, there is still a lot of growth to go for here.
This leaves me thinking that John Menzies’ shares are very cheap. During the last year, the company has made £58m of trading profits, while at 495p the whole business can be bought for £416m, including debt.
This gives a buyer a chunky pre-tax earnings yield of 13.9%. The dividend was increased back in August and the shares offer an appetising yield of 5.7% covered twice by profits.
Verdict: buy