Technology stocks have enjoyed a renaissance over the last couple of years. The likes of Apple and Google have given investors a taste of the dotcom glory days.
But you have to be incredibly careful when it comes to investing in technology stocks. They’re a devil to value… how many years’ profit should you pay for a company producing the latest gizmo or web service?
Today I want to show you two companies that released trading figures this week. One, a gizmo and gadget provider; the other, a great industrial titan… they’re great examples of what I mean. And one of them could be an absolute bargain right now.
Kicking TomTom’s tyres
On Tuesday, both Michelin and TomTom (the satnav maps provider) published results. Both are suffering because their key European market is back in recession. New car registrations in Europe are at a 17-year low. That means tyre and fancy new satnav sales suffer.
Yet, these two stocks couldn’t be more different. The old-economy industrial titan, whose shares are trading on a miserly seven times earnings. And the former barnstorming technology play, whose shares now trade on what looks like an expensive 20 times 2013 earnings.
First let’s take a quick look at TomTom…
The depressed market for new cars isn’t the only thing that’s dragging down TomTom’s sales. New technologies are causing problems too. It turns out that smartphones can do a satnav’s job pretty well. And anyway, many of those who were going to buy satnavs have by now already got them. Sales are dropping fast.
TomTom is forecasting 2013 earnings per share of 20 cents – down from 40 cents for 2012. That’ll be the lowest earnings figure since the company listed in 2005. And the future looks pretty bleak from where I’m standing.
It’s the classic problem with technology stocks. How many years’ earnings can you see? Nobody knows how technology will develop – but we’re pretty darned sure that it will. And boy, does this stuff change quickly. Disruptive technology can allow a company to grow earnings extremely quickly… but often those sorts of companies are vulnerable to being disrupted themselves.
Now over to Michelin…
Michelin will outlast them all
Michelin reported a mixed bag. Yes, European sales have taken a pasting. And it’s not just down to a dearth in new car sales. Replacement tyre sales are down too (maybe recession-weary consumers are running tyres down to the last treads?).
But on the bright side, Michelin is a diversified global giant. Michelin sells tyres for everything from bikes to aircraft and trucks. In fact, ‘speciality tyre’ sales have been doing rather well – revenues were up 13% as sales into the mining and farming industries grew. Margins on truck tyres have practically doubled since 2011.
What’s more, as an old-economy business, there is plenty of scope to adapt…
Over the next couple of years, Michelin will reduce production in France and up the stakes in the developing world. It can see some €1bn in cost savings up its sleeve. That should see profits move up from €2.4bn today to nearer €2.9bn come 2015 – at least that’s what management forecasts.
And in a show of faith, the directors have proposed raising the dividend from €2.1 to €2.4. That’s a 15% hike! And it still leaves dividend cover of almost four times.
When low tech is best
Moving production from France sounds like it could create political problems. I’m sure the transition won’t be without setbacks. But a multinational company like Michelin has political power of its own. Even in France, the government has introduced tax breaks for the biggies. Because they know that the companies can just leave if they’re mistreated.
Rising input costs will undoubtedly hurt Michelin. Commodities inflation may yet cause a headache if they’re unable to pass on price rises. But on that score, it’s good to see that the price hikes brought in during 2011 have been maintained through what turned out to be a tough 2012.
It seems that this company has the ability to ride out the tough times. At heart, the technology hasn’t changed much since John Dunlop made the first practical pneumatic tyre in 1887.
That matters because ultimately, low tech gives better earnings visibility. Unless someone comes up with a better solution than our century-old synthetic rubber technology, we can say with some confidence that Michelin will remain a leader in the tyre making business.
It’s a prize asset selling at a knockdown price. It was interesting to see that yesterday, Warren Buffett’s Berkshire Hathaway announced that it’s set to take control of another global titan – Heinz. Buffett understands the value of a low-tech business with a recognised brand – especially if it’s cheap!
The markets, on the other hand, don’t seem to care. Assuming management meet their stated goals, it leaves Michelin trading at something like six times 2015 earnings. That looks too cheap to me…
Maybe Buffett’s already sniffing around?
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