GDWN.L - Goodwin plc

[skanjete]

Goodwin plc a British company I highlighted a few months ago as an example in another discussion, but since I got some questions about the company from forum members, I thought it could be interesting to start a separate discussion on Goodwin plc.

 

Goodwin is an owner-operator. It's majority owned by the Goodwin family (> 50%) and the management is dominated by the family, principally by the brothers John and Richard.

 

The company has a respectable age and was founded by, guess who, the Goodwins in 1883 as an iron foundry. If I'm not mistaken, this is the sixth generation that is active in the company.

The activities of the company and premises of the company have grown over the years but the basic activity, steel casting and main factory, are basically the same as 130 years ago.

 

The current management, John & Richard, took over in 1992, so they have a track record of more than 20 years. And their track record is nothing short of phenomenal.

 

In my opinion, it's one of the most impressive track records I know off because the results were not due to favorable circumstances, on the contrary. The're not selling iphones, but casting steel, an activity that's onerous for it's capital intensity, low margins, labour unions and competition from emerging markets...

 

But the Goodwin brothers took one good decision after the other and all these seperate decisions compounded to a competitive advantage and miraculous return. They reformed the company to a patented producer of valves for the oil & gas industry, a producer of special pieces for nuclear submarines, tow bridges and specialty alloys for the newest energy generators...

 

So they gradually reformed the company from a low margin, capital intensive business to a high margin business that is based on knowledge, reputation and reliability. They also spread their wings in the world so that now more than 50% of their revenue comes from emerging markets.

 

The results were spectacular :

- net margins grew from 2-3% to 15% now

- average ROE of 24,5%

- they grew earnings per share by about 25%/year while

- paying an average dividend yield of 2,8% and

- no extra capital was invested in the company, the number of shares stayed exactly the same.

- the shareholders got handsomely rewarded : 1£ invested in 1994 (20 years ago), with dividends reinvested, would at 30th April 2014 be worth 239,4£ : a compounded return of 31,5%/year over the last 20years.

 

As you see : spectacular results in a very unspectacular industry.

 

Now for the valuation : the shares trade for little more than 10 times current earnings and 2,9 times book value.

The shares fell about 25% over the last few months. I suppose the market is afraid that lower oil prices will hurt them through lower oil & gas investment levels. They will certainly feel the pinch of lower oil & gas investments, but on the other hand, their track record also spans the 1990's when oil prices were terribly low.

 

So if one thinks they can go on for a few more years a a decent grow rate, the P/E of 10 doesn't seem too expensive.

 

 

[skanjete]

Something I forgot to mention : their book value is understated.

 

Their plant sites are in the book at original cost, and their main sites were bought in the late 19th century and 1950's, so I suppose the sites could be worth somewhat more than book. ;D

[ukvalueinvestment]

Are you sure?  Under IFRS, you can restate upwards in certain circumstances.  They might have done this?

 

Regardless - I like this company a lot as well.  It's basically a bet on the family continuing to do what they've done for 20 years.  The sons are involved in the business as well.  I want to do some diligence on how much oil downturn will affect them but this looks like a great entry point.

 

Shares are illiquid so that's another reason to be a long term holder.

[skanjete]

Are you sure?  Under IFRS, you can restate upwards in certain circumstances.  They might have done this?

 

Regardless - I like this company a lot as well.  It's basically a bet on the family continuing to do what they've done for 20 years.  The sons are involved in the business as well.  I want to do some diligence on how much oil downturn will affect them but this looks like a great entry point.

 

Shares are illiquid so that's another reason to be a long term holder.

 

They might, but in the former annual reports, it used to be literally stated that book value was an under-estimation.

About 2 years ago, I had a conversation with management, and when I asked them about it, they explained the difference  by referring to the time when the land was bought.

[shhughes1116]

 

But the Goodwin brothers took one good decision after the other and all these seperate decisions compounded to a competitive advantage and miraculous return. They reformed the company to a patented producer of valves for the oil & gas industry, a producer of special pieces for nuclear submarines, tow bridges and specialty alloys for the newest energy generators...

 

 

I'll preface my comment by saying that all I know about the company is what you provided in the initial post.  Aside from the obvious headwinds of the oil/gas industry, the UK is in the process of realigning their armed forces.  The Royal Navy's submarines will be impacted in some way, although it is hard to tell whether there will ultimately be a reduction in the number of ballistic missile submarines, or a reduction in the number of attack submarines, or a reduction in both (check out the 2010 UK Strategic Defence and Security Review).  This may be another headwind for the company if they manufacture parts for British nuclear submarines (likely a high margin business).  Maybe there is a Brit on the board who has more intimate knowledge of the UK's Strategic Defence and Security Review... 

[farbelow]

Thank you for another great lead.

GDWN looks very good: high ROE, high ROIC, very consistent performance and growth and low PE nevertheless. No excess spending on glossy reports. Their 2001 annual report looks like a faxed 40 page document.

Based on the limited information from GDWN's reports it is difficult to understand what makes them perform so well  (besides the Goodwin gene pool). Would you know which would be good companies to compare GDWN with?

[skanjete]

Thank you for another great lead.

GDWN looks very good: high ROE, high ROIC, very consistent performance and growth and low PE nevertheless. No excess spending on glossy reports. Their 2001 annual report looks like a faxed 40 page document.

Based on the limited information from GDWN's reports it is difficult to understand what makes them perform so well  (besides the Goodwin gene pool). Would you know which would be good companies to compare GDWN with?

 

There used to be some companies on the London Stock exchange with comparable activities, but some were taken over by private companies.

 

There's still Castings, they produce steel castings for the automotive (truck) sector, but this isn't a competitor of Goodwin. Castings is well lead, and their financials are in line with what one would expect from such an activity.

 

In any case, the financials of Goodwin are really off the charts. I don't know of any company in a comparable sector with comparable financials.

I think it's better to consider them as a niche player, a specialist in nickel alloy castings, which is a very specific activity. And their last annual report seems to suggest they're the market leader in this specific activity.

[ukvalueinvestment]

Take a look at the investor presentation on their website.  They seem to have numerous facilities and businesses all over the world.  I get the impression they do lots of things, not just nickel alloy castings - but they just allocate capital and run them very well.

 

I think the key to this investment is working out "normalised earnings".  Have they ridden an oil and gas boom or not?  What will earnings be over the next few years?

[petec]

This is an observation more than anything else (I have done no work on the company, but I like the sound if it): if you look at multiyear p/e, p/s, p/bv you don't get the sense that the current correction has gone far enough.  I'd echo the previous poster's call to look at sustainable earnings and figure out if the company has been over-earning (which often creates valuations anomalies).

[ukvalueinvestment]

By the way, I believe their 20 year record is of over 20% per year total return.  If there was a follow up book written to "Outsiders", this would surely merit a chapter.

 

And yet in the UK they are totally unheard of!

[frog03]

In Morningstar, 15 year total return is 28.79% per year.  I can only think of a handful companies that have done better in the stock markets over these 15 years.

[netnet]

Obviously they are truly outstanding operators, but, how likely is it they are going to put up equally good numbers in the future?  To move the margins from 2-3% up to the current level, probably moved the stock up considerably.  There (presumably) will not be another similar "turnaround" in the subsequent decades.  What constitutes "normalized" earnings and what is normalized growth if you will?

 

They are not finance guys so they are not going to do a Teledyne type shrink etc.  so you are left with a very, very well run specialty industrial company, that is in two industries that have head winds--defense and oil and gas.

 

Now that said, if it is a reliable high teens return for the next 10 years, well to paraphrase Munger, tough, there are way worse problems in life!  Plus one day the oil sector is going to come roaring back.

[skanjete]

Obviously they are truly outstanding operators, but, how likely is it they are going to put up equally good numbers in the future?  To move the margins from 2-3% up to the current level, probably moved the stock up considerably.  There (presumably) will not be another similar "turnaround" in the subsequent decades.  What constitutes "normalized" earnings and what is normalized growth if you will?

 

They are not finance guys so they are not going to do a Teledyne type shrink etc.  so you are left with a very, very well run specialty industrial company, that is in two industries that have head winds--defense and oil and gas.

 

Now that said, if it is a reliable high teens return for the next 10 years, well to paraphrase Munger, tough, there are way worse problems in life!  Plus one day the oil sector is going to come roaring back.

 

I wouldn't say they are in the defence sector. I just mentioned the production of special parts for a nuclear submarine as an illustration that they're not producing commodity products.

 

The are much more dependent on 1) energy generation sector and 2) oil & gas sector with the valves and maybe 3) jewellery sector through their refractory business. After the Macondo disaster, they certainly had a tailwind for a few years in their oil & gas segment because of extra, time-constrainted investments by the oil majors. This segment could face some headwind if there's a crisis in the oil sector in the coming years. My impression is however that management is concentrating on the energy business with their investments.

 

Some people ask themselves whether the current extreme results are tenable (I do too). But you could have asked yourself this question almost every year over the last decade. Besides, an investment doesn't have to return a compounded 30% a year to be succesful. I think it's clear Goodwin has a very talented management group, and I trust them to do the right thing over the coming years. It appears they still see possibilities for investment, since they had important investments over the last few years, mainly in extra capacity and the energy sector.

 

[ukvalueinvestment]

Totally agree.  At the end of the day you are investing in an excellent management team.  Over a very long period of time, do you think these are people you want to trust your money with to do intelligent things?  If managers consistently do the right thing in a non terrible industry, you will get a good result.

 

[farbelow]

I have compared Goodwin PLC (GDWN) to Castings PLC (CGS) and Crane company (CR). CGS and GDWN are comparable as they are both British companies, they both supply castings and both have a long history with a stable management running them. However, they have very different customers: GDWN mostly has customers in Energy and Oil & Gas, while CGS mostly supplies constructors of commercial vehicles and cars.

I found the additional comparable company, CR, by looking for suppliers of 'Dual Plate Check Valves', where Goodwin claims to be market leader. CR is a 3.5B USD  American company active in many other segments than just Check Valves and oil & gas.

 

Below are the comparisons.

 

                    GDWN    CGS        CR -1    CR-2

ROIC            22.3%    16.6%    27.5%    10.3%

ROE            23.4%    15.3%    14.9%    14.9%

Growth        6.8%      8.8%      1.6%      6.2%

EV/NOPLAT 11.55      9.20      23.10      23.10

EV/EBITDA  7.74        5.36      12.10    12.10

 

(CR-1 is excl. goodwill  and excl. revenue from acquisitions, CR-2 is incl. goodwill)

 

Crane company (CR)

 

Compared to CR, GDWN comes ahead on all counts . ROIC for CR-1 (excl goodwill) is high, but EBIT is distorted as it still includes the profit from acquisitions and with revenue from acquisitions excluded CR is not growing.

 

Castings PLC (CGS)

 

Compared to CGS GDWN is slightly more expensive, but has both higher ROIC (22.3% vs 16.6%) and higher ROE (23.4% vs 15.3%). GDWN seems supreme at capital allocation, which is key for a diversified industrial company like it is.

 

Additionally GDWN has plant and buildings more valuable than bookvalue (stated as recently as 2013 in there annual report): it is, however, unclear how much: anywhere between zero and a whole lot.

 

Conclusion

 

A significant disadvantage of GDWN is low liquidity of the stock, large spread, high transaction cost (9 GBP per order in my case through Interactive Brokers) and additionally 0.5% British stamp duty.

 

All in all I think GDWN is not a steal, but a good deal nevertheless for the long term. A good business for a fair price. I have bought GDWN.

 

[skanjete]

An essential difference between Castings and Goodwin is that Castings produces a mass product where they try to gain efficiencies by automation of the production.

 

At Goodwin, a big part of the production is based on unique pieces, specific for the client (eg. special pieces for tow bridge, parts of energy generation plants, the mentioned part of the submarine generator,...). So their advantage doesn't come from automation, but from specific knowledge of alloy casting. That's a reason their business doesn't need to be as automated as Casting's and thus doesn't absorb that much capital from continued investments in automation.

 

 

[skanjete]

In my opinion, the most impressive metric at Goodwin is the fact that they realised a compounded 30%+/year profit growth over the last 15 years, while paying out 25% of net profits as dividends.

They didn't raise a pound of extra equity capital over this period and never were too levered.

 

So the profits on their retained, reinvested capital are really enormous.

[farbelow]

Skanjete, thnx for the extra info. And I agree, it is very impressive. And at ages 60 and 62 the brothers Goodwin have some years left to repeat this feat.

[kab60]

Thanks a lot for the idea, Skajete. I've been spending the weekend reading through their annual reports and initiated a positition today. I'm not too sure about how bad the E&P issues will affect them, but everything about the way they do business and allocate capital is impressive so at 2xunderstated BV, single digit PE and high ROIC I can live with a bumpy ride. There's a presentation here for people looking into the business: http://www.goodwin.co.uk/2014/full-presentation

[Libs]

Operating margins averaged around 12% from '09-'12 then jumped to 18.8 % in 2014.

 

In the AR credit was given for this improvement based on running the operation 6.5 days a week-around the clock due to the 'buoyant energy industry."

 

Meanwhile margins in the 3rd quarter were only 8.5% ( 3MM net / 35Mm revenue.)

 

Is there seasonality here?

 

i'd love to own this stock but I'm worried margins were unsustainably high recently.

 

If they revert back to 12% the stock is probably ~ 16 times earnings still.

 

 

 

 

[Libs]

Operating margins averaged around 12% from '09-'12 then jumped to 18.8 % in 2014.

 

In the AR credit was given for this improvement based on running the operation 6.5 days a week-around the clock due to the 'buoyant energy industry."

 

Meanwhile margins in the 3rd quarter were only 8.5% ( 3MM net / 35Mm revenue.)

 

Is there seasonality here?

 

i'd love to own this stock but I'm worried margins were unsustainably high recently.

 

If they revert back to 12% the stock is probably ~ 16 times earnings still.

 

On the other hand, here is a quote from the latest report released just 12 days ago ( the 9 Mo report i referred to).

 

Chairman wrote:

 

"There have been no significant adverse events and the trading situation as advised at last year and at the end of the first half of this year is starting to ease down associated with the reduced capital expenditure by the oil and gas companies and tighter pricing."

 

So does that mean things are getting better or worse? What does 'eased down' mean?

 

Because if things are getting better, and i'm wrong about the margins, this would be a great buy at 2300.

 

 

 

[kab60]

Operating margins averaged around 12% from '09-'12 then jumped to 18.8 % in 2014.

 

In the AR credit was given for this improvement based on running the operation 6.5 days a week-around the clock due to the 'buoyant energy industry."

 

Meanwhile margins in the 3rd quarter were only 8.5% ( 3MM net / 35Mm revenue.)

 

Is there seasonality here?

 

i'd love to own this stock but I'm worried margins were unsustainably high recently.

 

If they revert back to 12% the stock is probably ~ 16 times earnings still.

 

On the other hand, here is a quote from the latest report released just 12 days ago ( the 9 Mo report i referred to).

 

Chairman wrote:

 

"There have been no significant adverse events and the trading situation as advised at last year and at the end of the first half of this year is starting to ease down associated with the reduced capital expenditure by the oil and gas companies and tighter pricing."

 

So does that mean things are getting better or worse? What does 'eased down' mean?

 

Because if things are getting better, and i'm wrong about the margins, this would be a great buy at 2300.

 

Full year operating margins have fluctuated between 9-18 percent during the last ten years, and I'm not really sure whether it's going up or down. I suppose most of their oil and gas exposure is related to the North Sea which has seen a steady decline in activitity for many years, but old rigs still needs new parts, so I'm not too worried that business will collapse just because there's a slowdown in E&P activities. I might be wrong, but I consider this somewhat of a jockey pick anyway. The Goodwins are not exactly spending a lot of time guiding near-term results but they do seem to invest heavily in the future. I think they say either in their annual reports or the presentation that they've taken 125 apprentices aboard because they have a hard time getting the required manpower. The presentation also gives you a good idea as to where their growth capex is going. The AR also has a very nice part on Goodwins performance (and executive compensation) versus "blue chip" companies. It's a really nice read.

[Jurgis]

Chairman wrote:

 

"There have been no significant adverse events and the trading situation as advised at last year and at the end of the first half of this year is starting to ease down associated with the reduced capital expenditure by the oil and gas companies and tighter pricing."

 

So does that mean things are getting better or worse? What does 'eased down' mean?

 

Because if things are getting better, and i'm wrong about the margins, this would be a great buy at 2300.

 

I agree that the paragraph is badly (or just Britishly? ) worded. "Ease down" in this context means that the things are getting worse because of "reduced capital expenditure by the oil and gas companies and tighter pricing."

[Libs]

Chairman wrote:

 

"There have been no significant adverse events and the trading situation as advised at last year and at the end of the first half of this year is starting to ease down associated with the reduced capital expenditure by the oil and gas companies and tighter pricing."

 

So does that mean things are getting better or worse? What does 'eased down' mean?

 

Because if things are getting better, and i'm wrong about the margins, this would be a great buy at 2300.

 

I agree that the paragraph is badly (or just Britishly? ) worded. "Ease down" in this context means that the things are getting worse because of "reduced capital expenditure by the oil and gas companies and tighter pricing."

 

Thank you! That's what I guessed.

 

I still find it a bit odd that margins dropped in half in the latest quarter, yet there were "no significant adverse events." Maybe margins are more volatile than I had thought.

 

 

 

[ukvalueinvestment]

I read it as them thinking about revenues and margins falling as inevitable at some point, given oil's cyclical and volatile nature.

 

When they talk about "adverse events", I think they mean something unexpected, like a large client defaulting.

 

I think Goodwin is worth a premium given their superb record, so I would be happy to pay 12-14 normalised earnings.  Question is, what are normalised earnings?  Market cap right now is 162mln, implying that I should be ok if normalised earnings are around 11.5-13.5 mln.  This year they made £24 pre tax.  So certainly worth further investigation