Jim Slater was truly a giant in the investing world. His book, The Zulu Principle, made growth investing available to anyone and helped reduce DIY investors reliance on analysts and their discounted cash flow models.
Back in 2014, writing in The Telegraph, Jim Slater touted Restore plc (LSE: RST) as a buy. The company specialises in document storage, scanning and shredding, to help businesses move into the paperless, digital world.
Since the guru tipped it, the companys valuation has ballooned from 133m to 416m. Im going to apply Slaters famous valuation techniques to this company to see if its still good value after todays trading update.
The companys priority has been to integrate the acquisitions Wincanton Records Management and PHS Data Solutions, which has seemingly gone off without a hitch. This has led to the expected synergies and trading in-line has been with expectations for the full year.
Analysts expect earnings to come in at 20.75p per share next year and 17.05p per share for this year just ended. Therefore, the company trades on a PE of 21.5 and is expected to grow earnings by 21.7%.
To check if a growth company was good value, Slater used the PEG ratio. He would divide the companys PE by its earnings growth rate. A result under 1 implied significant value could be on offer. Restores PEG ratio is roughly 1, compared to 0.63 when Slater first picked it, indicating there may no longer be enough upside to the shares.
Lets take a look at another Jim Slater pick.
Slater mentioned Telford Homes (LSE: TEF) in the same article as Restore, although its not performed anywhere near as strongly. Back then, its market cap was 172m. Now, its 237m.
The property developer builds homes in central London, where there is a significant demand for extra housing. Telford has confirmed that Brexit has done little to dampen demand, yet still it trades on a PE of only 8 and will offer a yield of around 4.8% if the final dividend grows by as muchas the interim.
However, analysts have predicted that Telfords earnings will fall next year, largely due to a small correction in London property prices. This makes calculating a PEG ratio impossible. That said, Im not sure Slater would dislike Telford because of just one bad year of growth. Indeed, his original thesis seemed rather bullish on London property.
I believe Slaters assessment was likely correct. In the next six or so years, a populace nearly the size of Birmingham is expected to pour into London. Thats clearly going to increase housing needs, potentially supporting high prices and catering to Telford.
However, property prices are notoriously difficult to forecast. Interest rate rises would, for example, make debt more expensive, therefore likely resulting in a fall in house prices. Brexit too introduces yet more uncertainty into the equation.
A classic British success story
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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.