TOP 5 SHARES

Earnings per share (EPS) | Dividends per share (DPS)

For the second consecutive year the team at Money asked Skaffold to provide a list of 50 stocks that have solid balance sheets and track records of good performance, and whose share prices offer value for money.

Of the 50 top-quality and value-for-money stocks, 13 are forecast to offer yield and growth, 30 offer forecast growth and 31 positive forecast yield.

From 2006 to 625 companies

Of all the stocks listed on the ASX, 1221 have negative earnings or equity, so their underlying values are $0. This first step immediately eliminates small mining companies yet to strike gold, and biotechs awaiting approval of their drugs. Because of forecast negative earnings Alumina, Mesoblast and Karoon Gas, among other larger well-known companies, also fail to make the cut.

625 become 41

Next we focus on quality companies with a track record of good performance, as shown by the Skaffold Score. The Skaffold Score rates quality and performance, providing a benchmark for consistency of earnings, debt level and quality of cash flow.

Quality is rated A, B or C and performance 1 to 5. Combined, the Skaffold Score rates companies from A1 to C5. Skaffold scores are completely objective and manufactured independently of human intervention and personal opinion. They update automatically following the release of a company’s full-year or interim results.

Skaffold’s preferred scores are A1, A2, B1 and B2. Making the grade are 165 stocks. Of those, 41 offer value for money.

Expanding the research

To find 50 stocks in a market where share prices have rallied above the underlying value of many businesses, we extended the search to A3 stocks. These companies are considered excellent quality but recent performance has been average.

Nine A3 companies with the highest estimated safety margins and positive future growth forecast or expectations the company will pay a dividend are included. Of the nine, Medusa Mining is the only A3 stock to offer both forecast yield and growth.

Quality companies missing the cut, because their prices are significantly higher than Skaffold’s value estimates, include News Corp, CSL, REA Group, Carsales. com, Wotif.com, IRESS, Domino’s Pizza, The Reject Shop and one of last year’s Top 5, ARB Corp.

To find this year’s Top 5 we applied two additional filters. Only companies whose earnings are forecast to rise over the next 12 months are included. Thirteen stocks are reduced to 10. We then ranked the list by forecast return on equity.

The Top 5 stocks, based upon Skaffold Score, value for money, future forecast value growth, forecast yield, future earnings per share growth and the highest forecast return on equity, are:

1. Decmil Group (DCG)

2. Cedar Woods Properties (CWP)

3. Mastermyne Group (MYE)

4. Clough (CLO) and

5. Flight Centre (FLT).

1. Decmil Group

As a business that provides design, civil engineering and construction works for the oil and gas, resources and infrastructure sectors, Decmil’s performance is closely tied to Australia’s resource companies. It also owns the Calliope Accommodation Village in Gladstone, Queensland, which is occupied by Rio Tinto and Xstrata workers, among others. On December 12, 2012, Decmil (DCG) announced a $30 million contract win to construct facilities for Rio Tinto’s Pilbara operations.

Eight analysts contribute forecast earnings and dividends figures for Decmil, which Skaffold uses to estimate future intrinsic valuations. The highest estimate for 2013 is 33¢ and lowest 26¢. Based on these forecasts, Skaffold estimates the underlying value of Decmil may rise to around $3.75 by 2015. A 25% variance in earnings per share estimates is something to be aware of and highlights the “unknown” factor currently overhanging Australia’s mining industry. Decmil is forecast to pay a 12¢ dividend in 2013, a forecast yield of 4.5%. Based on its latest full-year results, Decmil has plenty of cash in the bank and a strong balance sheet.

2. Cedar Woods Properties

Cedar Woods (CWP) is a housing investor and developer. Current projects include the $1.5bn Williams Landing residential development and Masters Home Improvements Store, 19km from Melbourne CBD.

Cedar Woods has achieved Skaffold’s highest quality rating, A, for nine of the past 10 years and debt is now just 2% of its equity. Profitability, as measured by return on equity, is an impressive 20%. There’s also plenty of cash in the bank – $24.6 million. Over the next few years Skaffold estimates the value of Cedar Woods could rise 11%pa, from $5.29 to more than $6.50.

3. Mastermyne Group

Listed in 2010, Mastermyne provides specialised services to coal miners. It has expanded beyond Queensland’s Bowen Basin to service NSW’s Illawarra and Hunter Valley.

Its client base includes BHP Billiton and Rio Tinto, and global players Xstrata and Anglo American. Of the Top 5, Mastermyne offers the highest estimated safety margin and forecast dividend yield; and the lowest forecast PE ratio. Cash flow from operations exceeded reported net profit after tax by almost $9m.

Mastermyne has a funding surplus – cash from operations more than covers all expenditure, including investments and dividends. The company paid $5 million in dividends in 2012, a yield of 4.9%, and dividends are forecast to rise in 2013. The January 11 share price of $1.58 represents a 23% discount to Skaffold’s intrinsic value estimate of $2.04, which is forecast to rise to more than $2.30 by 2015.

4. Clough

Founded in 1919, Clough (CLO) began life as a residential and commercial building company. In the 1950s CLO moved into civil and heavy engineering, and by the ’60s it had entered the oil and gas sector. Today Clough provides engineering and project services, focused off the north-west coast of Australia and in western Papua New Guinea. Its clients include Chevron Australia, Queensland Gas Company, Oil Search, ExxonMobil, Woodside Petroleum and Conoco Phillips Australia.

Improving economics since 2009 has seen Clough’s Skaffold Score improve to A2. If company forecasts are met, it will generate earnings per share of 10¢ in 2013, an increase of 53% on 2012 results. Clough has no debt and ended last financial year with almost $150 million in the bank. Return on equity is forecast to remain stable at around 20% over the next few years. Skaffold estimates the underlying value of Clough to be $1.06.

5. Flight Centre

With more than 2500 stores across 75 countries and a growing online presence, there’s a pretty good chance you’ve booked a holiday through Flight Centre (FLT). Given it has been twice judged Australia’s best employer, the experience would have matched its A1 Skaffold Score.

Aside from the GFC of 2008-09, Flight Centre’s valuation has consistently headed in a north-easterly direction. From a low of $3.40 in March 2009, the share price has soared to more than $28, a reflection of its excellent track record. Skaffold estimates Flight Centre is worth about $33 a share and its underlying value is forecast to rise as high as $38 by 2015. Rated A2 since 2010, the stock rose to A1 after the release of its 2012 full-year results. If the company meets analyst expectations of about $2.15 earnings per share for 2013, Flight Centre will most likely retain its A1 Skaffold Score at its next full-year report date.

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