On Wednesday, the Australian market closed at its highest level since September 2008. The S&P/ASX 200 Index crossed the psychologically significant threshold of 5,000 for just the second time since the 2008-09 global financial crisis.
As such, a number of stocks in the Australian Edge coverage universe now trade above their buy targets, though there are some companies whose shares still offer a compelling value.
One such name is Cardno Ltd (ASX: CDD, OTC: COLDF), an international infrastructure and environmental services firm whose stock got crushed in late November when management disappointed investors with its guidance for the first half of fiscal-year 2013 (ended Dec. 31).
Andrew Buckley, Cardno’s managing director, said expectations for the firm’s net profit after tax (NPAT) for this period would likely range between AUD36 million and AUD40 million, compared to AUD36.1 million in the year-earlier period, which included an extra week. Buckley noted that although Cardno was experiencing healthy organic revenue growth, its bottom line was suffering from greater competition, dampened pricing, rising costs, and project disruptions from its US segment due to both Hurricane Sandy and the election. For context, its North American business accounted for just over 51 percent of fiscal 2012 revenue.
Even though posting profits at the high end of that range would still mean year-over-year growth of 11.1 percent, this would be a far cry from the firm’s torrid pace of growth since 2004. Over that nine-year period, the firm’s NPAT grew at an astounding rate of 42.1 percent annualized, while revenue grew 40.2 percent annually.
In the two trading sessions following that announcement, Cardno’s shares fell 24.5 percent to AUD5.89. Though they have since rebounded almost 19 percent to AUD7.00, they nevertheless remain more than 23 percent below their 52-week high of AUD8.64. And since late December, the stock has traded in a narrow range between AUD6.70 and AUD7.00.
Although roughly 4.6 percent of Cardno’s outstanding shares are held by corporate insiders, no members of the executive team were reported to have bought shares following the stock’s decline. However, two key shareholders took advantage of the selloff by boosting their holdings significantly. Australian investment management company Perpetual Ltd (ASX: PPT) bought 2.2 million shares at an average price of AUD6.05, increasing its holdings in the company by 31 percent. Perpetual now owns 9.3 million shares of Cardno, or about 6.6 percent of shares outstanding.
And the top-performing mutual fund Westcore International Small Cap (WTIFX) bought almost 437,000 shares during the fourth quarter, increasing its holdings more than 22 percent to almost 2.4 million shares, or 1.7 percent of shares outstanding. Cardno now accounts for 5.1 percent of the foreign small-cap growth fund’s portfolio, which makes it the fund’s second-largest holding. Westcore first added the position to its portfolio back in 2008.
WTIFX beat the benchmark MSCI EAFE index in each of the four calendar years from 2009 through 2012. Over the trailing five-year period, it gained 9.7 percent annualized vs. a 0.5 percent annual loss for the EAFE, a performance which earned the fund a top 1 percent ranking in Morningstar’s foreign small/mid growth category. It also ranks in the top 5 percent of its category over the trailing three-year period.
Those with an attention for detail will note that its performance prior to 2009 was decidedly lackluster. However, the fund underwent a partial management change, and the portfolio managers adjusted their approach to portfolio construction, while retaining their value-oriented methodology for selecting growth stocks. These reforms apparently made all the difference. The fund is currently closed to new investors, so I’m merely noting these performance data to establish its credibility. In other words, Westcore’s bet on Cardno should be taken seriously.
Interestingly, Denver Investments, the fund’s advisor, cut its holdings in Cardno by almost 33 percent some time during the third quarter, perhaps as the stock traded near its high for the year. The firm has yet to report its holdings as of the end of the fourth quarter, so it remains to be seen whether the advisor picked up shares again during the stock’s selloff. On its own, Denver owns 3.3 million shares of Cardno’s stock, which is about 2.4 percent of shares outstanding.
The analyst community’s assessment of Cardno’s prospects is split, with four recommending the stock as a buy, while the other four rate it a hold. The consensus is for earnings to drop 2 percent for fiscal 2013, and then rise 9 percent the following fiscal year.
Though domiciled in Australia, Cardno derives just 5 percent of revenue from Asia, with the vast majority of its revenue generated by operations in the US and Australia. Aside from the 40 percent of revenue earned from environmental services, Cardno’s sources of revenue are well diversified across a number of market niches. That also holds true in terms of client types, though since it’s an Australian firm, resource-oriented customers account for 28 percent of revenue.
The company’s approach to growth involves both organic expansion and an aggressive acquisition strategy, where it looks for complementary businesses in new geographies that have limited overlap with its existing businesses. Cardno has completed 17 acquisitions since the beginning of 2010, with its latest acquisition announced just yesterday.
The firm paid AUD26.7 million for Geotech Materials Testing Services, a construction materials testing company based in Western Australia. Management expects the acquisition will be accretive to earnings for fiscal 2013.
Cardno’s shares currently yield 5.1 percent on a net basis, with a manageable 67 percent payout ratio. The dividend has grown almost 11 percent annually over the past 5 years.
The company has a solid balance sheet, with AUD108 million in cash and AUD197 million in long-term debt.
Cardno is scheduled to report earnings for the first half of fiscal 2013 on Feb. 19.
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