Emerald Group Publishing Limited
Copyright © 2000, MCB UP Limited
Opportunity strikes in 2000
Keywords Plimsoll, Analysis
In the first of three recent reports Plimsoll informs us that 2000 is going to be the year of opportunity for high-flying companies in the metal treatments industry, according to the first edition of 2000 of the Plimsoll Portfolio Analysis: Metal Treatments.
A total of 31 companies are shaping the industry as we enter the twenty-first century. What is so special about them is that they have achieved an amazing 15 per cent or better sales growth in each of the last three years. Without a doubt, they have been doing something different. This is in an industry where the average sales growth last year was an uninspired 2.4 per cent. Some of these opportunists will need to improve financially, but by capturing the market they are proving that a company can be exceptional even in the metal treatments industry.
For the remaining 1,039 companies, simply hanging on to current sales is going to be a problem. Last year 43 per cent of the industry failed to grow at all and a massive quarter of the industry saw sales decline by 25 per cent. But at least some have good cash reserves that will help them through 2000. Many of these will need to adopt a new strategy.
Perhaps their strategy might be to acquire a company. Plimsoll's latest edition will also be of interest here as it names 39 companies called "potentially desirable to own", which includes four major players. Estimates suggest that at least one of these will change hands next year. However, the others listed are less well-known smaller companies.
The year 2000 will see some companies fail, but this will create opportunity for the remainder. In analysing the 1,070 players in the metal treatments industry through the graphical Plimsoll model, the individual strengths and weaknesses of every company are revealed. See for yourself the trend in their performance over the last four years.
Also named are other exceptional companies such as "best trading partners", "best profit makers", "cash rich companies", "leaders in efficiency", and many more.
Plimsoll's top ten most aggressive companies in sales growth are:
Didcot Heat Treatment Ltd.
B.E. Wedge Holdings Ltd.
J. Kirkaldy & Sons Ltd.
Davies (Stoving Enamellers) Ltd.
Neptune Offshore Services Ltd.
Bodycote International plc.
Du Pont Automotive Coatings (UK) Ltd.
S. Lucas Ltd.
Ashley Industries Ltd.
Movac Group Ltd.
Acquisitions at the right price
In its second report, Plimsoll Acquisition Pack: Metal Treatments, Plimsoll informs us that 51 companies in the metal treatments industry have emerged as the most desirable companies to buy. Their current profits are poor and most are loss-making. Yet through Plimsoll's business plan each of these companies has been "tweaked" to deliver much more cash to their owners.
These companies were chosen because they had some of the highest disposable income in the industry, yet their costs seemed to be out of line with the industry norm. As a result very little profit was making it to the bottom line. "Perhaps new owners could bring a fresh approach to these costs and retain more profit for themselves", says Don Turkington, managing director of Plimsoll.
Most appealing to new owners would be that the earning potential on these companies was fantastic. On average their gross profits (money earned from sales before overheads are paid) was 41 per cent of sales, yet the industry average was only 31.1 per cent of sales. However, after the overheads were paid these companies were making on average a pre-tax loss of 0.7 per cent. A reasonable expectation would put this nearer the industry average profit margin of 4 per cent. Clearly, their money was going somewhere.
These 51 companies were paying more on salaries from sales than their competitors. Many also had very high interest payments. Initially, simply attacking these costs alone would bring immediate rewards. In fact, putting these costs back in line with the rest of the industry delivered a healthy profit within 12 months.
Creating profits from these companies is tested in the pack through a 12-month budget that produced a 10 per cent return on assets for each of the 51 companies. One company had a turnover of over £4.1 million and a 38 per cent gross profit margin yet a pre-tax loss of £103,000. By tweaking the costs a little, the business produced a £130,000 pre-tax profit within 12 months.
It sounds as if Plimsoll have all the answers, but bear in mind that this exercise was only one option. The Plimsoll Acquisition Pack is a product for developing a list of acquisition possibilities. Perhaps you already have some targets in mind. This could be the start of searching for an acquisition or it may sit with your current acquisition strategy.
In truth, any company is a potential acquisition prospect. So to encourage casting the net wide the Plimsoll Acquisition Pack: Metal Treatments contains 1,070 companies in book and electronic format to assess and test as well as the 51 best acquisition prospects with a speculative future year added. We estimate following this exercise that at least ten possibilities will be found. All you have to do is get them to sell at the right price.
Analysis exposes that the rich get richer
In the third report we are informed that to achieve top performance in the metal treatments industry you must beat the best. With an enormous gap developing between the "best" and the "rest" in the industry, effectively 119 companies are reaping massive profits while the rest of the industry flounder in mediocrity.
These 119 best companies are revealed in Plimsoll Portfolio Analysis: Metal Treatments, covering 1,106 companies. On average, these outstanding businesses are delivering a 17.3 per cent pre-tax profit margin! Believe it or not, this is four times better than the dull industry average of 4 per cent.
Delivering these outstanding profits is not easy; these companies excel in many areas. Gross profit margins are as much as 41.3 per cent of sales compared to industry norms of 33.8 per cent. This alone gives them a big advantage. But perhaps their biggest trick is their ability to "hammer the assets" by getting their fixed assets to generate more sales. Their sales returns on fixed assets are almost 18.3 per cent compared to the industry average of 17.8 per cent.
Turning sales into profits is essential if you are going to create a future. Turning sales into dividends and retaining profits rewards the shareholders and also builds strength into the company. These companies are doing both by returning on average almost 3 per cent of sales to the shareholders and retaining over 8 per cent of sales on the balance sheet to strengthen and provide for the company's future.
Pitch these companies against the one out of ten companies in the industry that is currently a loss maker and the comparison is frightening. These 122 loss-making companies are consuming almost 6.4 per cent of their sales. Essentially, they are drawing on reserves to fund their losses. Don Turkington, managing director of Plimsoll: "Profits are essential to drive a company's ambitions and to not constrain the management. You lose money, somebody has to pick up the bill!"
These loss-makers have three choices for the future, as they cannot continue to make losses. One, they can try to improve their profitability, which for many will prove very difficult. Two, they will fail and three, and perhaps most likely, the more profitable companies will snap them up on "the cheap", taking a new approach to clearing overheads and interest payments. What else will they do with all that cash?
Ultimately these loss-making companies will drop out of the bottom of the pack. What cannot be ignored is the shift in position of the 865 companies in the mediocrity with a slim 4 per cent on average margin as these rich companies continue to get richer. The pressure of which will be to force many of these into losses next year. So who is next?
To obtain more details of these reports and to obtain a free list of the top 50 most profitable companies in the metal treatments industry, ring Plimsoll on +44 (0) 1642 257800. Readers of this publication can receive a 5 per cent discount when mentioning this article on ordering.