General insurer, Royal & SunAlliance (RSA) was originally recommended in our Fat Prophets UK report in October 2003. At the time, we viewed the success of a rights issue as a key turning point in the company's future prospects. The insurer was also initiating an exit strategy from the unprofitable US operations, boosting claim reserves and increasing balance sheet strength.
During 2006, the outlook for earnings growth in RSA's primary businesses and regions (Europe, Asia and the rest of the Americas) remained excellent. However, following management's decision to sell the 'non-core' US operations, the group ended the American Depository Receipt program. As such, we recommended Members book their profits. |
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Another of our signature dishes, Scottish Power (SPI) has also undergone significant change. The disposal of PacifiCorp in America and the appointment of a new Chief Executive experienced in mergers lent credibility to the idea that a further shake-up in the form of a takeover was probable in the fast moving European utility sector.
In November, Spain's Iberdrola came forward with a cash and share offer valuing Scottish Power at 777p. The new company would be the third largest utility in Europe. Although we remain extremely upbeat on the utilities standalone prospects, we were also wary of the bid potentially coming to nought. As such we were more than happy to book substantial gains on a half sale recommendation whilst remaining partially invested in for exposure to long-term performance or a higher bid eventuating.
By April of 2007, the Iberdrola bid had progressed significantly. With regulatory approvals in America and Europe behind them, the two companies' futures as independent were certain in our view to be coming to an end. Although we hold a favorable view of utilities and this combination in particular, the cash and share transaction would have left our position significantly diluted. Given the stock had nearly doubled in price since our initial recommendation in 2004, we took the opportunity to lock in our remaining profits on Scottish Power. |
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Back in December 2004 when we originally recommended specialty chemicals and paints group Imperial Chemical Industries (ICI) rising raw material inputs and a creaking balance sheet weighed on sentiment. However, we saw things differently. Restructuring programmes targeting millions in cost savings were a welcome step in bolstering margins. Combined with the ability to pass on higher costs to customers, we believed ICI was in a good position. This was proven the case.
Further restructuring ensued as non-core business units were disposed of, and the process gained momentum as 2006 drew to a close. Free of debt, we became concerned that a large acquisition would be on the cards. On the other hand, a much nimbler ICI could become a takeover target itself. Given the relative uncertainty about ICI's future direction and with the prospect of a major acquisition certainly one option we believed it was time to lock in some healthy profits. We advised Members to sell half their holdings around 416p, whilst maintaining some exposure for longer-term gains. |
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| In our view the key attractions of Pittsburgh based Duquesne Light Holdings (DQE) were management's resolute commitment to the core electricity business and the utility's solid financial foundations. We believed a 'Back to Basics' business strategy would provide the foundation for enhanced earnings growth for years to come. In addition, within the consolidating US electricity industry, Duquesne was an attractive takeover target. Such was proven the case. In July 2006 a consortium led by Macquarie, an Australian securities firm, agreed to buy the company. With rival bids unlikely and the share price 'capped', we judged it prudent to take profits and invest the funds elsewhere. |
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| The old Pacific Dunlop conglomerate, now known as Ansell (ANN), had underperformed by a wide margin prior to our recommendation. However, a new management team was installed and detailed a clear strategy to turn around the company's fortunes. We saw merit in this strategy and recommended the stock to Members. Since then, Ansell has undergone a significant transformation, and sentiment towards the once out-of-favour stock has turned full circle. With the restructuring process largely complete, and the share price duly re-rated, it was prudent to realise some profits in our opinion. |
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| We issued a buy recommendation on Martha Stewart Living Omnimedia (MSO) after a tumultuous 2 years for the company following the indictment and conviction of the founder in relation to an insider trading investigation. Whilst the company's earnings and reputation suffered in the wake of the scandal, we viewed Ms Stewart's temporary fall from grace as a contrarian's buying opportunity. The next month, following particularly strong performance, we had some concerns that the strength of the rally would limit further upside. Given the prospects for a correction, we recommended Members sell half their holding in September 2004. In February 2005, we felt it prudent to further reduce exposure to MSO (another "sell half" recommendation), which had raced to an all time high of US$ 36.53 earlier in the month. The recommendation to sell all remaining holdings was made in October 2005 with increased concerns over the potential for a pullback in the share price. |
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| Fat Prophets initially recommended Diageo (DEO) in September 2003 based on our positive view of the company's earnings growth prospects in key markets. We were pleased with the solid performance of the share price following our initial recommendation, which was complemented by the dividends received. At the time of our sell recommendation, Diageo's US earnings had become increasingly significant to the group, the North American business contributing around 35 percent of group operating profit. We considered the continued weakness of the greenback as a legitimate concern with regard to DEO's medium-term earnings prospects. At this point, we felt it was a good time for Members to "lock in" the gains they had already made. |
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| At the time of our initial recommendation, we were encouraged that BAA's (BAA) strong results in spite of difficult conditions. The company's cash flow and balance sheet had remained strong despite difficult trading conditions. Remarkably, gearing had been maintained at a modest level of 42 percent in spite of a £267 million increase in net debt as a result of the extensive capital expenditure programme. After rallying to a 15 month high, the share price began to pull back in March 2004. We saw this as marking the start of a period of consolidation. With the prospects for further immediate upside limited in our view, we believed the best strategy was to take profits. |
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