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Smart Investor: a stock for the Buffetts, not the Grahams

This is a stock that'll separate followers of Benjamin Graham from Warren Buffett devotees, says Smart Investor.

Smart Investor: a stock for the Buffetts, not the Grahams

FTSE 250-listed WS Atkins (ATKW.L) isn't a household name. However, it is the UK’s largest engineering consultancy firm and the 14th-largest global design company in the world. Its clients include Transport for London, Airbus, BP (BP.L) and Rolls-Royce (RR.L), and it employs more than 17,000 people worldwide.

Its history dates back to 1938, when the company specialised in civil and structural engineering design. Since then, it has grown its range of services to include specialist services in planning, engineering sciences, architecture and project management. With a market capitalisation of £663 million, it is the 254th-biggest listed company in the UK and, notably, was the official engineering design services provider for the 2012 Olympic Games.


The past five years have been steady for WS Atkins, with the company’s net profit ranging from a low of £68.6 million in 2008 to a high of £106.8 million in 2012 (profits from discontinued operations have been excluded). Interestingly, the average return on equity (ROE) figure for the period is a negative number due to the company having ‘negative net assets’ between 2008 and 2010 – in other words, liabilities were greater than assets.

However, the fact that average ROE is negative should not be viewed as a weakness in terms of the company’s performance. Its price-to-book ratio is likely to be high (as will be discussed later on) but purely from a performance perspective the ROE is impressive, hitting 89.5% last year.

The shares currently yield an attractive 4.6% with a very comfortable payout ratio of 28.6%. It could be argued that the company should be paying out a higher proportion of profits as dividends but, equally, dividends have increased at an annualised rate of 5% over the past five years, which is understandable given the difficult economic circumstances.

Financial stability

As for financial soundness, financial gearing of 92.7% is high, but it is comfortably serviced, with the company having interest cover of 72. So, although debt levels are high relative to the company’s net asset base, this is due to a small amount of net assets rather than a large amount of debt, with the high interest cover ratio showing that the company is very capable of paying the interest due on its borrowings.

In terms of an economic moat, the company's business is to plan, design and deliver large-scale infrastructure projects. This is an area in which there will always be demand for a high-quality service that offers good value for money.

In addition, its client list includes public and private companies, which means it is not wholly dependent upon one or the other for its revenue. The mix of public/private can be broken down as follows: 32% private, 13% regulated and 55% local and national government.

Weathering the storm

The past five years show that even when trading conditions are challenging, WS Atkins is able to remain in profit. Therefore its economic moat, although not vast, appears to be of a sufficient size to offer reassurance to investors.

With shares currently priced at £6.62, WS Atkins currently trades on a price-to-earnings (P/E) ratio of just 6.2. However, because of its very low net asset value it also has a price-to-book (P/B) ratio of 5.8. Therefore, it could be argued that, based on its P/E, the shares are extremely cheap or, based on its P/B, shares are fairly expensive.

On 9 November 2011 I wrote an article that compared the investment styles of Benjamin Graham and Warren Buffet. Both are value investors who focus on many of the same aspects of companies such as profit track record, return on equity and price level. However, the two differ in their view of the price to book ratio, with Warren Buffett preferring a high P/B ratio (when ROE is also high) and Benjamin Graham favouring a low P/B, even if ROE is high.

The verdict

The reasons for this are detailed in the previous article but, with a very low P/E, a high P/B and a high ROE, this is one for the Buffetts and not the Grahams.

In other words, if you can live with buying the rights to future profits rather than a pile of assets, this is a company for you.

6 comments so far. Why not have your say?

Daniel Victor

Aug 10, 2012 at 05:59

Nice point,but earnings are forecast to fall next year,so I'm not sure the Buffetts would be quite that convinced.

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Aug 10, 2012 at 07:02

I often wonder when a company has had a period of negative equity whether the subsequent years have their financial ratios distorted a bit. I am not an expert in financials and usually avoid this sort of situation.

Opinions ?

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Denis Goddard

Aug 10, 2012 at 07:51

Srange that Warren Buffett was a disciple of Benjamin Graham!

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Aug 10, 2012 at 09:51

My old boss used to say: When a firm calls in consultants it's usually because they don't know what they are doing and are on the way out!

Unfortunately he did not have the final say and occasionally our department became the subject of a consultants survey.

To be honest, the reports that they produced were to my mind, total, unadulterated, academic hogwash, with no practical use whats-so-ever.

My boss must have viewed them with equal disdain, because I cannot remember any instances where their recommendations were acted upon.

I like to invest in companies which produce goods and/or services which are tangible and preferably financed 100% by equity.

If I wanted to invest in consultancy I would choose rare 1st edition books.

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David 111

Aug 10, 2012 at 11:46

Hotrod - I think there is a difference between management consultants (which I agree produce a lot of garbage) and consultants like Atkins which are in the engineering field. They do produce tangible goods/services in the form of engineering designs etc.

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Anonymous 1 needed this 'off the record'

Aug 10, 2012 at 12:15

I am concerned about the performance risk of these businesses which can be considerable and what guarantees they are liable for

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