Always on the hunt for a good small company investment opportunity, last Friday the Penny Sleuth visited Wardle, just outside Crewe.
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It was a massive distribution site that was once a World War II airfield. There I saw huge piles of soya, maize, and rapeseed, being mixed into animal feed. I stood in a vast warehouse surrounded by mountains of tuna, pineapple chunks and sliced peaches. And in the background, I saw oil tankers load with fuel.
I was at the headquarters of the NWF Group (ticker: NWF), a company that started out in 1871 as the farmers’ co-operative North West Farmers. I mentioned this distribution business last September in my newsletter Red Hot Penny Shares. Eight months on, I was glad to find that NWF is doing pretty well. After a confident trading statement earlier this month, brokers have increased their forecast profits for 2009 from about £5m to nearer £6m and there seems no reason why NWF should not enjoy growth over the next few years.
Solid growth through expanding market share
The real conundrum about this company is that it is operating in markets that are competitive and are not really growing much faster than GDP. And yet it is achieving good growth through expanding its market share. Its three divisions distribute groceries and fuel oil from the factory or terminal to the customer, and supply of animal feeds to farmers.
These businesses are hardly new, but perhaps this is the attraction. Established industries that are perceived to offer limited growth and which are already quite a crowded playing field do not tend to attract new entrants. The battle is fought by those that are already in the game and the secret of success is efficiency combined with good customer service…
NWF seems to be winning. It has scale, it clearly does not waste money on corporate luxuries, the service culture is very apparent and the management devotes its energies to the pursuit of finding even more efficient ways to run the business.
The service aspect is especially evident in the fuel distribution division. Here NWF delivers oil and petrol to home owners, farms, local authorities and service stations and although it has only 1.4% of the UK market, its local markets are defined by a thirty mile radius from the depot and within these it is a major player. NWF is pro-active with its customers and promises same day delivery if necessary. By contrast, the market leader, DCC, which has been growing by acquisition, has cut the local connection with the customer by operating from a centralised call centre. So far this strategy seems to have upset customers and worked in NWF’s favour.
An important competitive advantage
Service is also vital in the animal feeds business where NWF is a leading supplier to dairy herds. Here it supplies either compound feeds in pellet form or else a blended mix that is tailor made for each customer. The recipe for the latter is devised after an NWF representative has visited a farm and made an informed assessment of the requirements of the herd. Again this level of customer contact and support is an important competitive advantage.
But the biggest part of the business, at least in terms of the physical geography of the Wardle site, is the distribution of groceries. NWF carries ambient groceries from two hundred manufacturers or importers from the factory gate or dockside to the customer, delivering directly to small stores and cash and carries, or to the regional distribution centres of the major supermarkets. NWF spent £19m increasing the capacity of this business at Wardle and its news warehouses are already full. The focus now is to improve the efficiency of the operation, largely through making optimum use of its fleet of lorries, trying to ensure that they have full loads in both directions and do not travel empty.
These are all sound businesses in which NWF is clearly a strong competitor. Today’s share price of 107p is hardly extravagant and the shares offer a decent 4% yield. But that doesn’t automatically make this share a “buy”.
You see, the drawback is NWF’s balance sheet. Despite raising nearly £20m through the well-timed sale of its garden centres business last year, NWF still has debt of some £25m, so any major strategic move such as a new warehouse or the acquisition of a chain of fuel depots could require an equity issue.
The fact is that companies can look attractive at first glance. But you must make sure that you check them out in detail and avoid making these 5 foolish investment mistakes.
Best wishes,
Tom Bulford
For The Penny Sleuth
P.S. There are 5 “suicidal” mistakes that most investors make. Avoiding these could make the difference between making a lot of money and losing a lot. If you’re interested, I can show you the mistakes to avoid – and I’ll even show you the companies to buy right now. Click here before you buy another share.
P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.
