Tomkins plc is a global engineering and manufacturing group with market and technical leadership across its three businesses; Industrial & Automotive, Air Systems Components and Engineered & Construction Products (Hemscott Database, 2006). Tomkins is executing a focused growth strategy, targeting three key growth areas: Power Transmission; Aftermarket; and Building Products. The group is geographically diverse, operating in 132 manufacturing facilities and nine research and development facilities, in 21 different countries across North America, Europe, Asia and the Rest of the World (75.7 per cent of revenue to North America, 13.5 per cent to Europe, 6.9 per cent to Asia and 3.9 per cent to the Rest of the World).
Analysis of historical performance
Tomkins plc’s stock market performance during the last 10 years was relatively modest. The share price significantly underperformed in the FTSE All Share Index. Therefore, shareholders returns were relatively modest, only 25% for the 10-year period. Nevertheless, comparison with the Industrial Engineering Index shows that the company was affected by unfavourable development in the sector. As it follows from chart 1, Tomkins plc and the Industrial Engineering Index are likely to co move, which implies that as a global engendering company it is strongly affected by the developments in the sector. Therefore, evaluation of the company value from the shareholder’s perspective should be based on the developments within the sector and the relative attractiveness of the industrial sector.
Society Generale Equity Research (2005)
As it follows from chart 2, Tomkins plc has a diverse mix of products. Depending on the investors’ aims and preferences, it might be considered an advantage or disadvantage. Global presence and high diversification of products reduces company risk; at the same time, due to the size of the company, Tomkins plc is unlikely to strongly benefit from the favourable economic situation in one or another sector. Therefore, Tomkins plc’s share might be recommended to passive long-term investors, who are interested in gaining exposure to industrial sectors and would like to diversify their portfolio. One of the concerns is the company’s high exposure to the USA automobile sector. The decline of GM and Ford sales has led to a reduction of the Automobile OE to 21.1%. The unstable position of these companies on the market and low margins might lead to low future profits from this sector. The company’s management acknowledges low prospects in the USA market and focuses its future growth on the emerging markets, such as China and India, which expect to have continued strong growth. This strategy is very reasonable for an industrial company since it allows not only benefits from gaining access to a fast growing markets, but possibly reduce operation costs due to lower salary expenses. Nevertheless, it is worth stressing that expansion through value-enhancing acquisitions or Greenfield developments requires careful implementation. So far the company’s exposure to these markets has been quite limited and there is no proven record of superior management. Therefore, future expansion will definitely increase company risk. One suggestion is that company management might consider expansion to Russia, since the country’s economy is likely to benefit in future from high oil prices. Furthermore, the majority of the automobile industry has plans to significantly expand their production in Russia or increase exports, therefore gaining a position in the market which might be an important step in securing profits in the future.
Analysis of the company dividend policy shows that Tomkins plc’s dividends are related to the company’s earnings. During periods of expansion, the dividends tend to get a little bit higher. When the company’s earnings and share prices slumped in 2001, dividends were not severely affected, nevertheless the company paid out modest dividends in the following years. Therefore, in the future, investors can expect a stable dividend policy; a high dividend is likely only in the case of exceptional revenue growth. Considering Tomkins plc’s expansion strategy, the revenues are likely to be used for acquisitions or development of the new products and facilities. Furthermore, the payout ratio is around 60%, which implies that the company cannot substantially increase dividends. Considering a current price of 324 pence, a 15 pence dividend per share guarantees almost a 5% income for shareholders, which is important for the risk adverse investors. One of the factors that investors should carefully evaluate is Tomkins plc’s exposure to cyclical variations in the industry, in cases of unfavourable developments, company profits could be wiped out.
Chart 5 provides an overview of the historical P/E and ROA values, both are relatively stable with an exception of the short period between 2000 and 2002. The current value of the P/E and ROA ratios seems to be in line with the historical average; therefore, the company is unlikely to experience high fluctuations in share price in the short term. This statement is based on the following logic: Tomkins plc has very limited ability to increase its ROA above historical value. Therefore, returns and earnings will be relatively stable in the short term. Historically, investors valued Tomkins plc at P/E ratio 15, which is the current ratio of the company; therefore, the share price increase/decrease will be based on the change in the investor sentiment. Considering that the industrial sector cannot fundamentally achieve exceptional growth rates, the high increase in the share price is not likely. At the same time, Tomkins plc’s performance has been quite stable during recent years; therefore, there is no reason to expect any particularly unfavourable development in the coming years.
Further analysis shows that according to Morgan Stanley (2005) estimations of Tomkins P/E ratio is the very close to its peer P/E ratios. This implies that significant under or overvaluation is not likely.
Chart 6 shows that during 2000 and 2001 Tomkins had obvious problems due to low demand on its production and the inventory ratio decreased substantially. The company recovered in 2003 and 2004 nevertheless there is room for growth since the historical inventory and asset turnover ratios might be higher.
Chart 7 confirms several positive trends in Selling, General and Administrative Expenses, which have been continuously reducing, considering that company has been growing during the last 10 years. This ratio confirms management ability to scale production without increasing operation costs. Furthermore, cost of goods sold has a downward trend, which means that the company has more options to increase its margin. Finally, there is an obvious jump in the research and development expenses, which definitely reduced profitability in the short term, but confirms the company’s ability to invest into development while maintaining profitability.
The historical valuation of the company’s performance confirms that company management is able to act in the interests of the shareholders. The medicate stock performance can be explained by unfavorable economical developments; nevertheless the company confirmed its ability to restructure and respond to a changing environment. As it follows from Tomkins annual report (2005) the company developed several new products that were particularly successful when launched on the market.
Future Developments and Suggestions to the Company Management
Since Tomkins has very high exposure to the USA market, the future prospects of the company are directly related to developments in the USA economy. While the future of the USA automobile industry is gloomy, the construction was booming during the three years. Taking into account that 30% of Tomkins sales were building products, future developments in the housing market will have substantial effect on company performance.
As it follows from the IMF (2006) World Economic Outlook, the recent slowdown in the housing prices is likely to be an incentive for residential construction, which is reflected in chart 9. (Estimations by US Census Bureau and National Association of Home builders.) The slowdown on the housing market has other implications. Firstly, house prices affect households’ net wealth and capacity to borrow and spend; therefore, IMF suggests that a 10 percentage point slowing in real house price appreciation would reduce consumption growth in the United States by some 1/2–1 percentage point in the first year. While current GDP growth is still expected to be quite robust, Tomkins plc’s profits might decrease, due to high exposure in the construction sector. Therefore, one of the management priorities in future should be expansion into new markets, since industry growth is highly correlated with GDP growth. Only a vibrant emerging market will allow the company to achieve high growth rates. As a US-based company, Tomkins should focus on increasing its operation efficiency in the USA while continuously expanding into the new markets. The USA market provides good opportunities for the research, product development and relatively stable demand, while emerging markets are likely to have higher growth rates in future and more options for development. Therefore focusing on the core business and development of the new products for the old and new markets should lead the company to stable profits.
As it follows from the above analysis, while Tomkins plcs management was good, the company failed to create value to its shareholders mainly due to unfavourable economic developments in the sector. Nevertheless the company might be an interesting investment for risk adverse investors, who willing to have a defensive stock, with an exposure to global economical cycles in their portfolio. The company management seems to have a clear expansion strategy and relevant skills for its implementation.
Morgan Stanley Equity Research (2006) Tomkins plc
Hemscott Database http://www.hemscottinvest.com
IMF (2006) World Economic Outlook Globalization and Inflation
Society Generale Equity Research (2005) Tomkins plc
Tomkins plc annual report (2005)
Thomson Financial Database
|Worldscope Income Statement Ratios Report|
|TOMKINS P.L.C.||Symbol: TOMK (C000015477)|
|84 Upper Richmond Road East Putney House||CUSIP:|
|London SW15 2ST GBR||SEDOL:||0896265|
|Price – 5/9/2006||Shrs Out (th)||Mkt Cap (th)|
|DJ Sector: Industrial|
|DJ Industry: Industrial, Diversified||PE Ratio||Tot Ret 1Yr||Beta|
|PER SHARE DATA||12/31/05||12/31/04||12/31/03||12/31/02||04/30/01|
|Earnings Per Share||0.25||0.20||0.19||0.18||0.03|
|Common Shares used to calc EPS||771.42||770.72||771.04||770.93||857.69|
|Earnings Per Share – As Reported||0.20||0.19||0.12||0.03|
|Earnings Report Frequency||1||1||1||4||2|
|Extra Credit(Charge) Per Shr (excl)||0.00||0.00||0.00||0.00||0.00|
|Extra Credit(Charge) Per Shr (incl)||0.00||-0.02||0.01||-0.03||-0.15|
|Extra Credit(Charge) Per Shr (pretax, incl)||0.00|
|Discontinued Operations Per Shr||0.00|
|DVFA EPS (Germany only)|
|Dividends Per Share||0.13||0.13||0.12||0.12||0.12|
|Dividends Per Share – Gross||0.15||0.14||0.13||0.13||0.13|
|Dividend Report Frequency||2||2||2||2||2|
|Price/Earnings Ratio – Close||12.17||12.47||14.52||10.52||45.69|
|Price/Earnings Ratio – High||12.39||14.16||15.92||15.14||69.59|
|Price/Earnings Ratio – Low||9.71||11.83||9.00||7.27||39.25|
|Price/Earnings Ratio – Average Hi-Lo|
|Earnings Yield – Close||8.22||8.02||6.89||9.50||2.19|
|Earnings Yield – High||8.07||7.06||6.28||6.61||1.44|
|Earnings Yield – Low||10.30||8.45||11.11||13.75||2.55|
|Earnings Yield – Average Hi-Lo||9.05||7.69||8.03||8.92||1.84|
|Dividend Yield – Close||4.42||4.96||4.46||6.28||7.68|
|Dividend Yield – High||4.34||4.37||4.07||4.37||5.04|
|Dividend Yield – Low||5.54||5.23||7.20||9.09||8.94|
|Dividend Yield – Average Hi-Lo||4.87||4.76||5.20||5.90||6.45|
|Total Investment Return||23.02||-0.89||47.12||29.92||-14.38|
|Dividend Payout Per Share||53.80||61.86||64.76||66.12|
|Net Sales/ Revenues||6.78||-5.40||0.15||-23.38||-26.92|
|Earnings Per Share||20.72||9.93||2.09||430.70||-54.40|
|Dividends Per Share||5.00||5.00||0.00||0.00||-31.23|
|Return on Assets||11.46||8.58||7.96||7.18||3.32|
|Return on Equity – Total||42.31||38.59||45.25||48.81|
|Return on Equity – Per Share||42.44||38.72||45.33||49.54|
|Return on Invested Capital||19.39||15.29||14.59||13.07||6.48|
|Reinvestment Rate – Total||15.36||14.38||28.86|
|Reinvestment Rate – Per Share||19.61||14.77||15.97||16.79|
|Cost of Goods Sold % Sales||68.18||66.99||67.43||66.99||68.93|
|S, G & A % Sales||18.11||18.01||18.72||19.02|
|Research & Development % Sales||1.72||1.86||1.64||0.59|
|Operating Profit Margin||9.68||8.87||8.23||8.30||7.66|
|Operating Income % Total Capital||24.86||22.20||20.83||18.21||16.93|
|Estimated Average Interest Rate||14.28||4.94||4.26||15.78||22.70|
|Sales Per Employee||81162.85||80105.78||79447.42||77822.01|
|Total Asset Turnover||1.29||1.40||1.45||1.36||1.50|
|Net Sales % Gross Fixed Assets||1.68||1.67||1.73||2.01|
|Net Sales % Working Capital||4.42||4.93||4.98||3.77||5.16|
|Capital Expenditure % Sales||5.29||4.48||3.36||3.83|
|Fixed Charge Coverage||4.09||5.98||3.15||3.46||1.41|
|Dividend Payout % Earnings||60.19||68.23||40.87|