Ice Picks Unlocked

Fool.co.uk Motley Fool Share Advisor – March 2013 issue – Ice Review of 18

With Nate Weisshaar, Charly Travers, James Early

and Nathan Parmelee.

Inside this Ice review issue:

Fire: Aggreko

Nate has been watching this company

for a long time, and he now reckons it's

time to buy.

Duelling Fools: Aggreko

James asks the questions regarding our

latest Fire recommendation.

Ice: RPC Group

We're re-recommending RPC, the

plastic packaging firm.

Ice: Best Buys Now

Britvic and Stagecoach join RPC Group

as Best Buys Now.

Ice: Buys

Our latest views on six further Buy

recommendations on the Ice side of the

scorecard.

Ice: Holds

Halfords and Micro Focus join Unilever

as Hold recommendations.

Ice Picks Unlocked By Stuart Watson

Volume 2, Issue 1 -- Published 25 February 2013

Welcome to our Ice Review issue. This month, we're giving you our latest views on all 12 of the Ice recommendations we have made to date.

Our favourite right now is RPC Group, which we're re-recommending this month.

We're also selecting Britvic and Stagecoach as additional Best Buys Now for the Ice side of our scorecard. If you missed our Update earlier this month, where we introduced the concept of Best Buys Now, then you can find it here.

Ice refreshed

So what makes a good Ice share?

We think that investors with a more conservative approach might find the Ice style most appealing. By focusing on businesses that appear to enjoy consistent financial performance and growing dividends, we're aiming to beat the market via a mix of income and steadily rising share prices. Unilever, we believe, is a great example of this. We doubt it will ever top the performance tables over the course of a single year, but its long-term record speaks for itself.

We consider Ice to be a lower risk investing strategy than Fire, but company and industry specific risks mean diversification remains important. So we consider a portfolio of 15 to 20 shares, across multiple industries, is probably most suitable, if you fancy an Ice-focused portfolio.

Halfords gave us an early demonstration of the importance of diversification, as its share price slid not long after we selected it. But we still believed in the business, and held firm. The share price has indeed bounced back strongly, and it's now beating the market, thanks to a little help from Mr Wiggins and Ms Pendleton.

As we have seen with the likes of Britvic, which surged 60% following news of a proposed merger, Ice shares can generate large, short-term gains on occasion. But with these Ice shares, we're generally expecting steadier gains over time, and hopefully shallower declines during market corrections.

http://newsletters.fool.co.uk/1503/recommendations/index.aspx

http://newsletters.fool.co.uk/1503/coverage/updates/2013/02/11/introducing-best-buys-now.aspx

Motley Fool Share Advisor


Icebergs or ice cubes?

When we launched Share Advisor this time last year we said "these qualities are most commonly found in established firms, but the Ice approach will not focus exclusively on companies in the FTSE 100. We see ample opportunity to invest in smaller companies, with strong niche positions in their industry and the ability to grow their dividends for years to come."

And that has indeed proved to be the case so far. In fact, of the Ice shares we have selected to date, only two of them, Unilever and Vodafone, currently command a spot in the FTSE 100. We would be surprised if that situation remained the same over the long haul, but it will depend on what opportunities the market offers us.

We hope you enjoy this review issue. We start with a new Fire share, before moving into full-on Ice mode. As ever, if you have any comments or questions, you'll find us lurking on the discussion boards.

Foolish regards,

Stuart Watson

http://newsletters.fool.co.uk/1503/community/index.aspx



Fire: Aggreko

By Nate Weisshaar

With operations in more than 39 countries, Aggreko is the largest provider of temporary power and temperature control solutions in the world, supplying power not only to events like the London Olympics, but also supporting underdeveloped power grids in emerging markets.

Why buy?

Aggreko is the leader in its market, and generates impressive returns on capital. Its shares are currently trading nearly 30% off last year’s highs.

The company’s management team has been together for 10 years, demonstrating an ability to grow the company rapidly and profitably, while keeping shareholders’ interests in mind.

Demand for electricity in emerging markets is expected to continue to outstrip new generating capacity, creating a large long-term opportunity for further growth.

Key stats:

Ticker: AGK

Market: Main (FTSE 100)

HQ: Glasgow

Website: www.aggreko.com

Industry: Industrials

Position in industry: Leader

Recent price: 1,700p

Initial buy guidance: 1,850p

Market cap: £4.5 billion

Yield: 1.2%

Cash/debt: £23m/£701m

Insider ownership: 4%

Biggest threat: Stalling emerging market growth.

Data as at 22 Feb 2013

The power outage during this year’s Super Bowl was a black eye for the US’s aging electric grid, but it is far overshadowed by last summer’s blackouts in India, which left 620 million people without power for two days. As dramatic as that event was, it was just a concentrated version of the reality faced by over 1 billion people every day.

The hard truth is the rapidly growing economies of the world’s emerging markets are outstripping their electrical grids (when they have electrical grids that is). The lack of reliable access to electricity is a brake on growth, which is why governments and utilities call on this month’s Fire recommendation, Aggreko, to help them bridge the gap in their power networks.

http://www.aggreko.com/



The company

Aggreko was founded in 1962 in the Netherlands, and established a presence in the UK just over a decade later. It was acquired by the Salvesen Group in 1984, and when it was spit out as its own listed entity in 1997, it had a presence in the US, Singapore, and the Middle East.

Today, Aggreko has almost 200 service centres in over 100 countries, temporary generators capable of providing over 10% of peak electricity demand in the UK, and generates £1.5 billion in revenue and £255 million in net income.

The Americas and Europe, Middle East, and Africa (EMEA) account for around 80% of the business, with the remainder coming from the Asia Pacific region. Aggreko operates two closely related business divisions: its Local operations and its International Power Projects (IPP).

The Local operations take care of headline-grabbing events like the Olympics, the World Cup, and the Super Bowl, but also supply generators and temperature controls to oil & gas producers (the shale-based fracking activity in the US has been a boon), manufacturers, builders, and the military.

Aggreko’s IPP division focuses on larger contracts that last for a couple years. Utilities are this group’s main customers, and in fact account for 41% of Aggreko’s total revenue. The company stepped in to assist Japan’s electrical utilities after the tsunami and shutdown of that country’s nuclear reactors. But most of its utility business is providing extra power in countries like Cote d’Ivoire or Mozambique, where the local power company just doesn’t have the capacity to meet rapidly growing demand.

As shown in the table below, Aggreko’s business has been growing rapidly in recent years, thanks in large part to its growing presence in emerging markets.

Year ended 31 December 2008 2009 2010 2011 TTM

Revenue (£m) 947 1,024 1,230 1,396 1,493

Operating income (£m) 205 262 315 343 373

Net income (£m) 123 168 213 232 255

Operating cash flow (£m) 222 352 389 403 385

Return on capital employed 28.5% 29.0% 32.4% 28.0% 26.2%

Earnings per share (p) 46 62 79 87 96

TTM = trailing twelve months. Net income for 2011 and TTM adjusted to remove the impact of a one-time tax benefit.



As you can probably tell, a good portion of Aggreko’s business is event driven – sporting events, natural disasters, war – which can create a bit of lumpiness when contracts end and assets have to be redeployed.

This lumpiness is one reason the company’s shares sold off dramatically in December. With Japan’s utilities getting back on their feet, and the US pulling out of Afghanistan, two significant sources of business are expected to come to an end this year, causing a £100 million drop in revenue.

Management shocked markets by saying that the current uneven growth in emerging markets means new business may not be able to make up for that drop, and the numbers in 2013 could be below 2012’s results. With the shares trading on a P/E over 20, this was not what the markets wanted to hear, and the shares dropped 22% in one day.

While I’ve liked Aggreko’s execution and opportunity for a while, the shares have long looked a bit pricey. I think December’s sell-off, in conjunction with what I see as favourable long-term market growth, are giving us an opportunity.

Management

Despite some changes in the past few months that saw long-time regional directors Bill Caplan and Kash Pandya pass the reins to a new, internally promoted generation, the company’s management team has the tenure and attitude I like to see.

CEO Rupert Soames has been with the company since 2003, and CFO Angus Cockburn joined in 2000. In addition to being with the company for a good amount of time, I like the way Messrs. Soames and Cockburn view the business.

Looking at the company’s key performance indicators (KPIs) will give you an idea of what I mean. The five KPIs are: safety, return on capital employed, diluted earnings per share, customer loyalty, and staff turnover. The focus on staff and customers is refreshing, and is an approach that I think is often underappreciated.

Valuation and Key Metrics

I also think management’s focus on return on capital employed is reassuring. Aggreko’s business is very capital intensive – it takes a lot of expensive generators to make up for a shortage of power plants, especially when you are doing it around the world. Because of this, the vast majority (sometimes all) of the company’s operating cash flow goes into building out Aggreko’s fleet of generators.

In the past five years, Aggreko has spent nearly £1.5 billion on building up its 8,700MW of generating capacity and network of service centres. This makes its fleet more than 6 times the size of its nearest competitor, APR Energy, and allows it to service clients the world over.

However, it also means there is little free cash flow. Normally, I would be concerned about this, but Aggreko’s return on capital employed has consistently been over 25% since 2007. If they can invest my cash flow and get a 25% return, I’m happy to let them do it.



Aggreko is currently selling for about 11 times operating cash flow, which isn’t blindingly cheap, but I think it is a reasonable price for the dominant player in a growing market, especially when the company seems to be a proven quality operator.

I think Aggreko’s shares are worth between £22 and £24, so if we ask for a 20% margin of safety, I think the shares are an attractive buy to around £18.50.

Risks

The capital intensive nature of Aggreko’s business offers some protection from competition, but it also means that if business slows, the company has a lot of idle assets and salesmen. If we were to see a dramatic and prolonged slowdown in emerging markets, it could hurt profit and cash flow.

Additionally, if the stalled growth was prolonged enough, emerging market utilities might be able to close the supply/demand gap, which could jeopardise Aggreko’s future growth.

While Aggreko holds a dominant position in a highly fragmented market, APR Energy is investing heavily in its generator fleet. It is possible APR could use price cuts to win market share, which could hurt Aggreko’s cash flow.

A third threat is the recent rise in debt. Aggreko generates enough cash that I’m not too worried about it right now, but it could cause trouble if we were to see a slowdown, or if management had to choose between expanding its fleet and paying down debt.

Summary

Cheaper is usually better, but I’m willing to pay a higher price for what I think is a great company. With the recent sell-off in Aggreko’s shares, I believe we are getting just that sort of opportunity. The company’s size and the asset intensity of the industry should provide protection from competition, while the infrastructural shortcomings of rapidly growing markets should provide ample room for further growth.

Duelling Fools: Aggreko

By Nate Weisshaar and James Early

James: How does Aggreko stack up against its competition?

Nate: Aggreko is the leader in this industry. It boasts a fleet capacity of almost 9,000MW, which is 6 times that of its closest competitor, APR Energy.

APR’s fleet is growing rapidly and is relatively younger, but Aggreko’s heavy annual investment means its fleet of gas-powered generators – currently in high demand because of the relatively low cost of natural gas and stricter emissions standards – is nearly as large as APR’s entire fleet.



The major engine manufacturers – Caterpillar, Honda, Cummins, etc. – also sell portable generators, and their dealers offer competition on a local level, but none appear able to offer the global network that Aggreko has.

James: If the bulk of Aggreko's turnover comes from supplying third-world countries with power, what happens when they eventually build out real power infrastructure? Won't this mean a gradual loss of business, eventually?

Nate: Hopefully, yes. I look forward to a world where everyone has access to electricity from a permanent grid, and Aggreko’s equipment is only needed in emergencies. However, given the track record of governments addressing infrastructure needs – even in politically stable countries like India, the US, or the UK – I’m not expecting to see fixed power plants catch up to demand in the next decade. That is plenty of time for Aggreko to reward shareholders with solid returns.

James: More near term, you don't seem as concerned as the market is about Aggreko's recent slow-down. Why is this?

Nate: In the near term I may not be, but I don’t invest for the near term. I see the likelihood of a prolonged slowdown in emerging markets – especially those in Africa and Asia – as very low, and 2014 is a major sporting year (Olympics, World Cup, and Asian Games) that should provide a nice bump to business to help offset any slowdown we see in 2013.

Importantly, Aggreko’s management is reacting to the expected slowdown by reducing investment in new kit. This is a nice lever they have to maintain strong cash flow, even if we don’t see sales grow as rapidly next year as we have in the past few.

James: Does Aggreko tend to sell these units outright, or just lease them?

Nate: While Aggreko does manufacture the majority of its generators at its new factory in Dumbarton, it is just in the leasing business. In fact, they claim to use their generators for their entire life, as opposed to many others in the industry that derive meaningful income from selling used equipment.

James: My wife's blow dryer sometimes dims our power. Does Aggreko make smaller units for home use?

Nate: I’m sure they’ve got something in their fleet that can handle that. You just need to find a parking spot for the trailer.



Ice: RPC Group

By James Early

RPC Group is the European market leader in rigid plastic packaging.

Why buy:

Market leadership in an attractive segment of the packaging industry.

Still appears to be significantly undervalued.

Dividend has almost doubled over past three years.

Key stats:

Ticker: RPC

Market: Main (FTSE 250)

HQ: Rushden, Northants

Website: www.rpc-group.com

Industry: Packaging

Position in industry: Regional leader

Recent price: 440p

Initial buy guidance: 500p

Market cap: £730m

Yield: 3.3%

Cash/debt: £18m / £203m

Biggest threat: Worsening economy on the Continent.

Data as at 22 Feb 13

Hours before I wrote this, my wife and I took our four-year-old to a display of how Lego is made. I try to forget about share investing from time to time, but as soon as I saw the vat of polymer granules being shaken out into Lego block-sized piles, ready to be melted, I thought immediately of our beloved plastic packaging company, RPC Group.

And while RPC, as a packaging business, doesn't make Lego, it didn’t take much more looking around to notice the many other things it does make: shampoo, lotion, and soap bottles, asthma inhalers, bottles for cleansers, sauces, mayonnaise, olive oil, honey, paint, and almost anything else you can think of that comes in a plastic container.

Yes, Fools, the world has been overrun, and not by alien invaders, but by plastic. It’s this 'can’t-get-away-from-it nature' of its products that led your Share Advisor team to re-recommend RPC as the Ice share to accompany this Ice Review issue. That and the potential for over 35% upside along with a fast-growing dividend.

http://www.rpc-group.com/



The company

RPC was recommended fairly recently in Share Advisor, but for a refresher, it was fused together a bit more than 20 years ago from the combination of five packaging companies. CEO Ron Marsh, who helmed one of these five firms before the consolidation, essentially grew RPC into the European leader in rigid plastic packaging it is today.

Mr. Marsh recently announced his forthcoming retirement this coming October. He’s put in a good long tenure, and all CEOs need to retire sooner or later (or they should), so I’m grateful for the ample lead time he gave us as investors and his replacement, Pim Vervaat, who has been RPC’s finance director since 2007.

As noted in the original recommendation, the plastic packaging industry overall is growing robustly – from $610 billion in 2010 to $820 billion in 2016 by one estimate – and rigid plastic is amongst its best niches.

To roughly double its returns on capital from a 2009 level of 10.7% to 20% by 2014, RPC is focusing on the most profitable end of the rigid plastic spectrum, which is specialised “high valued added” containers that keep track of medicine dosages, dispense coffee into single-serve coffee machines, or block oxygen from food products to reduce their spoilage.

And while we all know that plastic is everywhere in developed countries, I’m most moved by RPC’s citation that 30%-50% of food may go to waste before going to market in developing countries, simply for lack of proper packaging. So, it’s clear that emerging markets represent a massive packaging opportunity. That should bode well, as does the fact that RPC’s last dividend increase was 25%, which I feel indicates a company that’s well in tune with its shareholders.

Valuation

RPC has risen by over 10% from its original recommendation price, but I could see this company being worth £6 per share. I arrive at this sum by using a 10% growth expectation for the next few years of operating profits, along with a somewhat high 11% equity discount rate. This leaves well over 30% upside remaining.

Risks

Quite simply, the main risk to RPC is the European economy. The company sells heavily in both the UK and mainland Europe, so an easing of purchasing in either locale would ding turnover or margins. A modest positive is that RPC is quite diversified amongst product lines, many of which house necessities that tend to be purchased regardless of economic conditions.

The second major risk – affecting RPC and Lego alike – is rising polymer prices. RPC, to its credit, has decided that it’s in the packaging business and not in the polymer-buying business, so it tends to pass these costs through to its customers. And while this has helped RPC score superb earnings during times of high polymer prices, it’s possible that were prices to rise too much, RPC’s customers may offer more resistance.



Summary

If I’m honest, the making of Lego wasn’t a particularly impressive display. Shaping plastic pellets into various forms no doubt requires technology beyond my ability to appreciate, but relative to, say, aerospace or computing, it’s not quite as far beyond.

Plastic is an inherently straightforward business, which is just how we like things from the Share Advisor Ice perspective. Rigid plastic containers are remarkably prevalent already, and seem poised to proliferate further, as the developing world adopts our mass-production, consumer-oriented tastes.

We reckon this provides a sound backdrop for investors owning a leading maker of rigid plastic containers, and that’s why we offer up RPC as our first Ice re-recommendation.

Ice: Best Buys Now

Earlier this month, we introduced the concept of 'Best Buys Now', to highlight the previous buy recommendations we've made that we think are the most attractive right now.

We've already selected Burberry, Filtrona and Spirent from the Fire side of the scorecard. On the Ice side, we're now picking RPC, Britvic and Stagecoach. You'll find all these shares are marked with a Now label on our online scorecard. Going forward, we'll refresh the list of Best Buys Now once a month. Keep your eyes on our weekly emails for news of any changes.

Britvic

By Nathan Parmelee

Current view: Best Buy Now

The past year has been a challenging one for Britvic. A safety issue with new caps for its top-selling Fruit Shoot drink led to an expensive recall in July, and created the opportunity for Share Advisor to recommend the shares. That was followed in September with news of a merger with A.G. Barr. The full merger details were announced a couple of months later.

Everything was going far better than expected, with the merger helping Britvic shares realise gains I expected would take two to three years to achieve. But we were dealt a setback earlier this month, when the OFT recommended the merger to the Competition Commission. A deal with A.G. Barr is now much less certain, but I continue to believe Britvic remains an attractive investment on a standalone basis, and I reckon it is attractively priced, because of its opportunities to improve margins, and to continue the international expansion of the Fruit Shoot brand.

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/1503/recommendations/index.aspx

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Britvic has also announced that Simon Litherland, the head of its Great Britain unit has been promoted to CEO, replacing Paul Moody who was set to step aside after completing the merger. In my view, Litherland's past experience leading Diageo's GB unit should have him well prepared for the job.

There is a chance the deal with A.G. Barr will be revived, but my thesis for Britvic has reverted back to the original plan of international expansion of Fruit Shoot, improved distribution and efficiency at home, and a gradual improvement in margins, leading to a reduction in debt, all of which should hopefully lead to a higher share price.

I'll be watching Simon Litherland's plans closely, but with the shares at a substantial discount to the likes of A.G. Barr, Nichols, and other beverage producers, I'm comfortable rating Britvic shares a Best Buy Now.

Stagecoach

By James Early

Current view: Best Buy Now

Transport company Stagecoach gets a nod for a Best Buy Now quite simply because of its attractive valuation. If that thinking sounds unadorned, perhaps it is – but it's by design. In my view, Stagecoach is simply a classic Ice share, and I feel it is trading at a price below its intrinsic value.

If you’ve been following Stagecoach, you may recall that the market was tickled when the company surprised on the upside with a strong half-yearly showing – like-for-like turnover rose 6%, and management bumped the interim dividend by more than 8%. This drove the shares up by about 12% in a hurry.

I feel this is illustrative of the market’s skeptical-until-proven attitude towards Stagecoach (which is simultaneously the source of our profit opportunity). In other words, we’re aiming to exploit a time-honoured secret of investing. Buy a company the market has only modest expectations of, and enjoy gains as the business delivers steady, if somewhat unspectacular, results.

So that’s our plan. But one bit of excitement that’s kept Stagecoach in the news was the West Coast Rail franchise, which it runs in tandem with Sir Richard Branson’s Virgin Rail Group. Stagecoach, which had operated the franchise for 16 years, protested that the recent bidding evaluation process was flawed, and that FirstGroup’s initially victorious bid was unrealistic, and a recipe for trouble down the road (er, rail).

Patrick McLoughlin, the Transport Secretary, overturned the award, giving Stagecoach an extension, and temporarily halting franchise bidding elsewhere. On the topic of botched franchise bid handling, Stagecoach CEO-apparent Martin Griffiths recently spoke before Parliament, urging an overhaul of the Department for Transport’s franchising methodologies, all in the name of restoring investor and public confidence. I think we’re all for improving flawed processes, but there's a potential threat here, if an unlikely one, depending on what changes are made to the franchise process.

Stagecoach’s bus services are broadly thriving, and North America in particular remains a growth spot, with the newfound prevalence of megabus a pleasant counterpoint to the long-held assumption that Americans would rather be taken ill with the plague than travel by bus.



In all, I don't see this as a sexy share, but rather a consummate Ice investment: a bit boring, but seemingly undervalued. With the shares just below £3, and my valuation estimate north of £4, I feel comfortable anointing Stagecoach a Best Buy Now.

Ice: Buys

Below we run through the remaining Buys on the Ice side of the scorecard (i.e. those we haven't classed as Best Buys Now).

Debenhams

By Nathan Parmelee

Current view: Buy

I'm convinced that UK retailers are among the most hated investments in the world right now. That's because every screen I run for new ideas returns a whole bunch of them. Debenhams finds itself lumped in with the rest, though its performance has actually been quite good.

That makes Debenhams a stand out in my view, as most of the retailers I've researched seem cheap for good reason. Some have declining sales, and others have shrinking margins, while some unfortunate retailers are suffering from both. Fortunately, Debenhams isn't suffering from either of these problems. Its sales are growing, its gross margin improved in the last year, and its operating margin would have as well, but the company is investing to support the 40% sales growth it is experiencing online.

We've only had Debenhams on the scorecard for a month, and I believe it's going to take Mr. Market a little while to recognise the quality of the results it's producing. I do believe, though, that this company should eventually get rewarded with a higher multiple. In the meantime, it just needs to continue adding a couple of stores a year, franchising internationally, and expanding its online store. If Debenhams executes on these three fronts, I reckon everything should work out well.

Fidessa

By Charly Travers

Current view: Buy

Fidessa is one of the leading global software providers to financial institutions. Its sophisticated trading platforms allow these firms to trade multiple asset classes, such as shares and bonds, on exchanges around the world. The bright spot is that its products are tightly integrated into the operations of over 900 clients.



What has been a challenge for Fidessa is the decline in equities trading in 2012. Trading volumes were down 20% last year, and this puts significant pressure on its customers, who depend upon fees generated from trading activity. Fidessa noted that industry consolidation and client business failures cost them 7% of revenue. As a result, Fidessa's revenue in 2012 was virtually flat compared to 2011, at £279m.

Looking out to 2013, Fidessa CEO Chris Aspinwall said the company is seeing signs of improvement in equity trading volumes, and that the company has growth opportunities through selling new products, such as its derivatives trading platform, However, he reckons the benefits from these improvement are not going to happen quickly enough to produce overall growth in 2013. So, Fidessa's financial results this coming year are likely to be the same as the last, although Aspinwall is hopeful that the company can then resume its historical growth trajectory.

Even after the recent rise in Fidessa's share price, I view it as undervalued against my fair value estimate of 2,400p. I think long-term investors should be patient with Fidessa, to allow for the company's growth initiatives to show up in its financial results.

Homeserve

By James Early

Current view: Buy

If you’ve been following our favourite home repair business, you likely know that the biggest issue remains the forthcoming FSA fine, resulting from Homeserve’s (LSE: HSV) improper telesales in the UK. I don't like telesales any more than you do, so I’m fine with karma doing its job here, but this remains the big issue to watch until whenever it comes to fruition. The market appears to be prepared to some degree, though.

In the meantime, Homeserve has cleaned up its act rather nicely, easing off the fruits of its most aggressive labours in the UK, and has been doing well internationally overall. Buying 100% of France’s Domeo helped, and customers have been growing apace in the US and Spain, since I made the initial recommendation. As we noted in a recent update, Italy and Germany remain profit-challenged, but we’ll give Homeserve a bit more time before getting anxious.

In all, we’re happy with our return so far, but might need to cross our fingers regarding the FSA's decision. That said, I still see more than 20% upside from here.



Laird

By Nathan Parmelee

Current view: Buy

It's been a quiet three months since I selected Laird, but the shares have more or less matched the FTSE's recent climb.

Since its recommendation, Laird has held an investor day, and issued a very brief trading update stating its results are on track, and that the recommended total dividend for the year is 10p. So there really hasn't been much reason for investors to get too excited or too gloomy.

I suspect that the company's biggest announcement of the past few months is one that appears to be relatively small and unimportant on the surface. On 13 February, Laird announced it was paying $1 to acquire 100% of Nextreme Thermal Solutions, a maker of thin films that can be used to cool electronics in tight spaces.

Don't let that $1 purchase price deceive you. The potential payout is up to 40% of revenues from 2014 to 2018, with a cap on the payout of $60 million. It's reasonable to assume that any new products from the acquisition might take time to ramp up their sales. But if the $60 million payout threshold is hit, it's likely the acquisition would be generating more than $40 million a year in sales by 2018.

In today's terms, that's more than 5% of Laird's total revenue, so clearly this acquisition has the potential to be a significant contributor to future results. That potential is a few years away. In the here and now, our next chance to get a meaningful look at Laird's progress comes on 1 March, when its full-year results are due to be released.

Morgan Crucible

By James Early

Current view: Buy

We pounced on shares of materials company Morgan Crucible a few months ago, after its shares had been drubbed following poor Chinese and European sales results. At the time, I saw 20% upside. As it happens, we’ve enjoyed around 20% upside since the recommendation.

Morgan’s most recent results came in a bit under expectations. There was turnover and margin weakness at its engineered materials division, which saw yearly revenues decline by 15% on a constant-currency basis, as the Chinese scaled back on wind power and the Americans scaled back on body armour (the US is Morgan’s largest single market, though just over 30% of total turnover).

Margins were down several percentage points as well, although its Superwool industrial insulation is selling apace. But, in either a strategic, compensatory, or a distracting gesture, Morgan also bundled in news of a name



change – to the less mellifluous Morgan Advanced Materials – and a re-organisation to align the company along geographies rather than business lines.

Will it work? Morgan can’t control the global economy, which plays heavily into its results. At these prices, I’m inclined to happily hold, but recognising that it could be a year or more before we start to see meaningful capital appreciation again. I'm keeping the shares as a Buy for the moment, though, and I'm happy to collect the dividends while we wait for more action.

Vodafone

By Charly Travers

Current view: Buy

There are opposing forces acting upon Vodafone. In our favour lies the impressive performance of Verizon Wireless in the US, in which Vodafone has a 45% ownership stake. In its other markets, Vodafone is benefitting from the consumer transition from mobile phones to smart phones, like the iPhone, as well as the increasing popularity of tablets. These devices result in higher monthly bills for consumers, and more revenue for Vodafone. Smart phone penetration remains low in many of Vodafone's markets, and the company should benefit as adoption rates increase.

In contrast, Vodafone is suffering from price competition and poor economic conditions in several key markets, including Australia, Italy, and Spain. Accordingly, total revenue was down 2.6% in Vodafone's most recent quarter.

Vodafone's dividend yield of 5.7% is quite attractive. But I am mildly concerned about the security of this payout, and Vodafone's ability to keep increasing it, given the company's substantial cash requirements for acquiring spectrum and investing in its infrastructure.

I do believe that Vodafone shares are undervalued, due to its Verizon Wireless stake, for which I estimate a pre-tax value of £60 billion. Achieving fair value for its Verizon Wireless holdings could be a challenge, given the huge size of any deal. But in recent conference calls, both management teams are appearing open to making it happen. I'll be watching this closely.



Ice: Holds

We have listed Unilever as a Hold for many months now, and today we're moving Halfords and Micro Focus from Buy to Hold as well.

Halfords

By James Early (TMFJamesEarly)

Current view: Hold

If there’s any share that demonstrates the virtue of patience (or maybe just plain luck), it’s Halfords.

I recommended this share as my first in Share Advisor, believing its ongoing price slide had placed it into attractive value territory. We then watched that slide continue for another 40%, before the shares finally bottomed out. Fortunately, they then took inspiration, and rose 80% to give us the double-digit gain we enjoy on the scorecard now.

Halfords, which sports a new chief executive, eased into its turnaround by first delivering smaller losses than before (less bad is still good), and is now more focused on real growth. Bikes, while still not settled, saw a boost from the Olympics and the Tour de France. Importantly, Halfords’ Wiggins-inspired premium cycles are selling well, despite some doubters who felt the brand was limited to cost-conscious recreational cyclers.

Autocentres are another bright spot, even if growth is slowing slightly from its initially torrid pace following the acquisition of this operation. Boosting like-for-like car maintenance turnover has been Halfords’ wefit service, which offers installation of headlamp bulbs, wipers – things most of us could proudly install given the right mood, but which we clearly prefer not to, as evidence shows.

I believe Halfords’ shares are trading a bit richly now, so I’m changing their rating to Hold. My long-term thoughts centre around the viability of the overall concept. While Halfords has prime locations and name recognition, would further separating the auto and outdoors businesses be wise? Nobody can know for certain, but if you have some thoughts on this, please post it on the boards. We love hearing from our members!

Micro Focus

By James Early

Current view: Hold

Micro Focus has been quite the red-hot performer, rising nearly 50% to lead our Ice pack. Recall that this business helps companies use programs written in “legacy” coding languages within their newer IT systems.



That sounds odd, until you hear that 80% of business software is written in COBOL, a language invented in 1959! Micro Focus, in other words, salvages decades of work these companies have put into their programs.

CEO Kevin Loosemore stepped in a few years back to effectively rescue this company by refocusing and getting tough, and he’s achieved splendid results, as the share price indicates.

If you must have something negative to make this success story feel a bit more realistic, note that the share price dipped earlier this month when the company announced the completion of the acquisition of three small software firms for £10 million. Micro Focus paid for this out of cash on hand, and the size itself would seem fully manageable, so it’s possible that the market whiffs the fragrance of overeagerness emanating from a business whose mainstay lines may be very slowly eroding.

Alternatively, these small deals may stroke memories of less successful acquisitions made in the past – deals which contributed to the 2010-era malaise that Mr. Loosemore is helping to pull the company out of. I’m not worried myself.

Currently, I believe Micro Focus is trading a bit over its rightful valuation, so I’m moving its shares from Buy to Hold. As more numbers come out this year, I’ll review Micro Focus’ valuation and post an updated result as warranted, but for now, I advise investors to Hold.

Unilever

By Nathan Parmelee

Current view: Hold Core

We were counting on emerging markets to help consumer goods giant Unilever (LSE: ULVR) overcome inflationary challenges and deliver consistent growth in 2012. That's what we saw, plus a little bit more, because as the year went on, sales growth accelerated and Unilever's shares followed suit.

Unilever's strongest units are its personal care and home care units. The company has invested in new products, acquisitions, and improved marketing and distribution to drive growth in these categories, and the investments have been a success. I expect the recent sale of the Skippy peanut butter brand for $700 million will be used to further solidify the already strong positions the two units enjoy, and that should lead to continued growth.

All the good news comes with a little bit of bad. I reckon Unilever shares are no longer the great value they were at the beginning of last year. Still, the shares are reasonably priced, and Unilever still has all of the same positive traits working in its favour. That's more than enough reason to continue holding them, and if Unilever executes on its plan to gradually improve margins, then we might be pleasantly surprised again a year from now.



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Ice Picks Unlocked

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