High CROCI Stocks: LON: RMV, LON: FOUR & LON: TEP

Looking at 3 stocks with high CROCI on the FTSE 250

May 15, 2024

You might be asking yourself what CROCI is!

CROCI stands for "Cash Return On Capital Invested." It's a financial metric used to evaluate how well a company is generating cash relative to the amount of capital it has invested in its business. This includes things like buildings, equipment, and other assets needed to operate.

In business terms, CROCI helps investors answer a key question: "For every pound the company spends on its stuff (capital), how much cash does it get back?" A higher CROCI percentage means the company is more efficient at turning its investments into cash, which is a good sign for investors.

Rightmove PLC (LON: RMV)

CROCI: 257.8

In the ever-evolving economic and geopolitical landscape, investors holding shares across various sectors face uncertainty. Rightmove (LON:RMV), a giant in the market with a valuation of approximately £4.716 billion, exemplifies this scenario. The company, integral to the portfolios of many investors, including those of pension funds, has experienced a notable share price fluctuation over the past year.

Financial Overview of Rightmove PLC

Here is a glance at Rightmove’s financial performance over recent years:

|-------|----------------|----------------------|-----------------------|-----------------------|

| 2019 | 289 | 214 | 19.6 | 2.8 |

| 2020 | 206 | 135 | 12.6 | 4.5 |

| 2021 | 305 | 226 | 21.3 | 7.8 |

| 2022 | 333 | 241 | 23.4 | 8.5 |

| 2023 | 364 | 260 | 24.5 | 9.3 |

Recent Stock Performance and Market Sentiment

Over the past 12 months, Rightmove’s share price has declined by approximately 2.94%, with a more significant 5.71% drop when viewed against broader market movements. This trend has extended over six months, showing a downturn of about 24.1%. Amidst this backdrop, analysts’ ratings present a mixed but cautiously optimistic view, suggesting further investigation for potential investors. Currently, Rightmove holds three buy, six hold, and two sell recommendations from analysts.

While recent fluctuations may cause concern, Rightmove has demonstrated resilience. The company’s latest annual results showed a 10% increase in sales and dividends, aligning with expectations despite a slight drop in total memberships and website traffic, which can be attributed to higher mortgage rates affecting buyer interest. The anticipated flat growth in agency numbers doesn't seem to deter predictions of stable earnings and dividends moving into the next fiscal year.

Moreover, the competitive landscape for Rightmove has intensified with CoStar's acquisition of OnTheMarket, potentially shaking up the market dynamics. Despite this, Rightmove’s robust market position and the tendency of agents to cluster on popular platforms provide a cushion against immediate threats. However, the lower operating margins of competitors like CoStar, who offer cheaper agency fees, highlight a need for vigilance.

4Imprint Group:

CROCI: 80.

4imprint Group plc (LON:FOUR), a prominent player in the promotional products market, has recently experienced a notable decline in its stock price, down by 9.2% over the past week. Despite this short-term fluctuation, the company's fundamentals and a deeper financial analysis suggest a potentially undervalued opportunity for retail investors.

Key Financial Indicator: Return on Equity (ROE)

A critical measure to consider is 4imprint's Return on Equity (ROE), an indicator of financial efficiency, which stands impressively at 27%. This figure not only surpasses the industry average of 9.9% but signifies high profitability relative to the equity capital invested by shareholders. Historically, companies with a high ROE, coupled with effective profit retention, exhibit robust growth prospects. However, 4imprint’s scenario presents a puzzling contrast: despite its high ROE, the company has seen a five-year net income decline of 14%, mirroring the industry’s downturn during the same period. This divergence raises questions about underlying challenges possibly affecting the company's earnings potential, such as high dividend payouts or competitive pressures.

Dividend Policy and Earnings Utilization

4imprint has maintained a consistent dividend policy over the past decade, indicative of management's commitment to shareholder returns, even at the expense of faster earnings growth. The company’s payout ratio over the past three years has averaged around 48%, with forecasts suggesting a similar trend. This approach, while rewarding for income-focused investors, might limit the company's ability to reinvest in itself and hence, curtail faster growth.

Valuation Insights: Discounted Cash Flow Analysis

A more granular analysis using the Discounted Cash Flow (DCF) model suggests that 4imprint’s stock might currently be undervalued. The model, which projects future cash flows and discounts them back to their present value, estimates 4imprint’s fair value at UK£84.77 per share—a notable 23% higher than the current trading price of UK£65.20. Such a discount presents a potential investment opportunity, assuming the market adjusts to recognize the company’s intrinsic value.

Market Position and Growth Outlook

Despite the recent earnings decline, 4imprint’s position in the market remains robust, characterized by a debt-free balance sheet and earnings sufficiently covering dividend payouts. The company’s revenue growth is also expected to outpace that of the broader British market. This favorable outlook is reflected in analyst forecasts, which anticipate an improvement in earnings growth in the coming years.

Telecom plus PLC

CROCI: 71.6

When exploring investment opportunities, many are drawn to the allure of potentially lucrative but high-risk ventures in startups that, as of yet, show no profit or even revenue. Such investments frequently lead to losses, serving as expensive lessons in the volatile nature of the market. Companies that continuously operate at a loss must eventually turn a profit or risk losing investor interest and facing decline.

For those investors who prefer more stability, Telecom Plus (LON:TEP) may be a worthy candidate. Its financial health, indicated by consistent revenue and profit generation, merits attention for its growth prospects rather than just its current valuation.

Acceleration in Telecom Plus’s Earnings

Market efficiency theories suggest that a company’s stock price should align with its earnings performance over time. Telecom Plus has notably increased its Earnings Per Share (EPS) by 22% annually over the past three years. This kind of robust growth suggests promising future prospects if sustained.

A deeper look into the company’s financials reveals that while EBIT margins have stayed relatively stable over the past year, the company has achieved a significant 141% increase in revenue, reaching UK£2.8b. This growth, combined with stable profit margins, underscores the company's potential for sustained profitability.

Leadership and Insider Investment

Investor confidence often increases when company leaders invest personally in the stocks they manage, aligning their interests with those of the shareholders. At Telecom Plus, insiders not only lead but also invest significantly, holding shares valued at approximately UK£105m. This substantial insider holding should reassure investors of the management’s commitment to the company’s success.

Moreover, the compensation for Telecom Plus’s CEO is reasonably aligned with industry norms, standing at UK£1.5m for the year, which is slightly below the median for comparable companies. This moderation in pay, along with significant insider investment, supports the premise of a management team that is well-aligned with shareholder interests.

Investment Consideration for Telecom Plus

Telecom Plus appears as an intriguing option for growth-focused investors, thanks to its impressive earnings growth and strong insider commitment. While the company’s share price has experienced volatility, dropping 34% over the past year despite significant underlying earnings growth, this might reflect temporary market sentiments rather than long-term potential.

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