In his revered investment book One Up on Wall Street, US fund manager Peter Lynch wrote: ‘Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path…

‘Once you’re able to tell the story of a stock to your family, your friends, or the dog… so that even a child could understand it, then you have a proper grasp of the situation.’

For this reason, investors should be suspicious of management teams who over-complicate and try to baffle investors with corporate jargon and management speak. Instead, those companies whose best in class communication skills leave shareholders in no doubt as to what their business models
(how they make money) and strategies (how they plan to keep on making money), could be better prospects for your stock picking research.

Clothing-to-furnishings retailer Next (NXT) is an excellent corporate communicator. Chief executive Simon Wolfson’s pronouncements on the state of the consumer economy carry clout with investors and the board is well versed in keeping the market abreast with Next’s near-term outlook for sales, profit and cash flow.

Next also routinely updates investors on the thinking behind its methodology for returning surplus cash via share buybacks and/or special dividends.

The strategic report section of the annual report & accounts, where Wolfson opines on Next’s business model, retail space expansion and store profitability and addresses the special dividends/buybacks debate, is essential reading for investors and other CEOs alike.

LONG TERM PLANNING

Lower down the market cap ranks, we’re fans of the clear and concise way in which high-flying Games Workshop (GAW), the Nottingham-based company behind the Warhammer universe, explains its business model and growth strategy.

Under ‘strategy and objectives’ in last summer’s annual results announcement, CEO Kevin Rountree explained Games Workshop’s ambitions remain clear: ‘to make the best fantasy miniatures in the world and sell them globally at a profit, and it intends doing so forever’, adding that ‘all of our decision making is focused on the long term success of Games Workshop, not short term gains.’

Helpfully, Rountree took investors through the strategy part by part – we’d encourage readers to have a thorough spin through, but the highlights include:

‘The first element – we make high quality miniatures. We understand that what we make is not for everyone, so to recruit and re-recruit customers we are absolutely focused on making our models the best in the world. In order to continue to do that forever and to deliver a decent return to our owners, we sell them for the price that we believe the investment in quality is worth.

‘The second element is that we make fantasy miniatures based in our imaginary worlds. This gives us control over the imagery and styles we use and ownership of the intellectual property. Aside from our core business, we are constantly looking to grow our royalty income from opportunities to use our IP in other markets.’

Games Workshop’s third element is the global nature of its business. ‘We seek out our customers all over the world. We believe that our customers carry our Hobby gene and to find them we apply our tried and tested approach of recruiting customers in our own stores, by offering a fantastic customer experience.’

The fourth element is being focused on cash. ‘By delivering a good cash return every year we can continue to innovate, surprise and delight our loyal existing customers and new customers with great product. To be around forever we also need to invest in both long term capital and short-term maintenance projects every year, pay our staff what they have earned for the value they contribute and deliver surplus cash to our shareholders.’

In more recent half year results (9 Jan), Rountree said the business was in great shape, having reported record sales and profit levels in the period.

PULLING NO PUNCHES

Investors also know where they stand with Kiwi carpets king Geoff Wilding, credited with turning around flooring manufacturer Victoria (VCP:AIM), now generating a heady mix of organic and acquisitive growth. Wilding’s entertaining utterances from
the chair are required reading. For instance, in the latest half year results announcement (28 Nov 2017), he sets out concisely one of the core tenets of Victoria’s investment case, its cash generation:

‘Flooring manufacturers structured like Victoria can generate large amounts of cash. Favourable supplier arrangements, rapid manufacturing matched to demand, customer payment terms, and longevity of key items of plant all contribute to a very high percentage of reported earnings turning to net cash,’ says Wilding. ‘This was reportedly one of the key reasons legendary investor, Warren Buffett, acquired the world’s second largest flooring manufacturer, Shaw Industries.’

Last summer, Wilding outlined two incredibly valuable assets that are not tangible, but key to the AIM manufacturer’s successful performance:

‘First and foremost, Victoria’s wider management team. Shareholders will, I’m sure, be reassured to learn we avoid hiring pure MBA-types (excepting, possibly, to make tea) and the depth of our management’s industry experience and product knowledge, their motivation, enthusiasm, and desire to win, and their overall management skill is second to none.

‘I have absolutely no doubt that we have the best management team in the industry, with most having a significant portion of their net worth invested in Victoria.’

BEING STRAIGHTFORWARD IS THE BEST POLICY

Another straight-shooter is Mike Allcock, chairman and joint chief executive of family-controlled lighting systems supplier FW Thorpe (TFW:AIM). Half year figures (15 Mar) revealed a 3.8% revenue rise to £53.2m and pre-tax profit up 0.9% to £7.9m for the six months to December.

During the period, which saw Netherlands-based emergency lighting specialist Famostar acquired, ‘order income did not reach the record highs of 2016/17, making a further record-breaking full year result a challenge’.

To his credit, Allcock said revenue and profit should be bolstered by the addition of Famostar in the second half of the year; ‘however, whilst the group will endeavour to reach record levels, it seems unlikely’.

Such openness is very refreshing in a world where so many company directors are trying to dress up results and make them look much better than they actually are. (JC)

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