Shares in industrial parts distributor Brammer could give investors a 50 per cent return with a quick-fire trade over the coming months. The investment case is simple: because of Brammer's focus on maintenance in the European industrials market, the shares have been oversold and represent one of the best ways to play a stock market rally if Europe's leaders agree to supply cheap credit in huge quantities.
- Cyclical stocks should soar on euro stimulus
- Solid growth from key clients
- Buck & Hickman acquisition boosting growth
- Quick and fat returns possible
- Eurozone business confidence at rock bottom
- High-risk trade needs a stop-loss
The parameters for the trade are based on technical analysis and are straightforward. Twice in the past 12 months, Brammer's share price has bounced off a level around 235p. So getting in at the current price is a decent starting point.
If Europe gets further cheap credit and markets rally, the immediate price target would be last July's high of 335p. If the price hits that, it could spike as high as this April's 383p. So selling within that range would offer profits of somewhere between 32 per cent and 51 per cent.
However, trading is a tricky game, so it would be sensible to set a stop-loss at 230p. All bets would be off if the European situation worsens and Investors Chronicle's technical specialist, Dominic Picarda, says that, if Brammer's price dropped below 230p, there wouldn't be much to stop it plunging to 2009's lows of 70p.
Despite the most recent indicators of business confidence in the eurozone pointing towards the worst quarter in three years, Brammer has been fairly resilient. It says that underlying sales growth in the first four months of the year was 10 per cent; adding in the first-time contribution of its recent acquisition, Buck & Hickman, boosts the growth rate to 29 per cent. The distributor also says that sales to its "key accounts" were up 16 per cent after adjusting for exchange rate fluctuations, and comprised over a third of turnover.
BRAMMER (BRAM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 253p | MARKET VALUE: | £296m | |
| TOUCH: | 248-253p | 12M HIGH: | 384p | LOW: 215p |
| DIVIDEND YIELD: | 4% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 101p | NET DEBT: | 30% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 478 | 18.9 | 17.4 | 5.5 |
| 2009 | 426 | -1.5 | 0.1 | 5.5 |
| 2010 | 468 | 19.3 | 13.0 | 6.6 |
| 2011 | 572 | 24.5 | 16.8 | 8.4 |
| 2012* | 665 | 40.0 | 24.9 | 10.0 |
| % change | +16 | – | – | +19 |
Normal market size: 800 Matched bargain trading Beta: 0.9 *Peel Hunt forecasts (profits and earnings are not comparable with historic figures) | ||||
Because of the speed of Brammer's recent 35 per cent share price decline, analysts at broker Espirito Santo have upgraded their recommendation from 'sell' to 'neutral' but think investors should wait for the price to hit 235p before buying. Meanwhile, broker Peel Hunt thinks a price target of 390p is fair given Brammer's ability to defend its profit margins.
A way to gear up returns would be with a spread bet. Assuming a buying price of 253p, a long position at £25 a 'point' (1p price change) would generate profits of £2,050 before costs if the share price rallied to 335p. Setting a stop-loss at 230p would mean losses of £575. Any gain on a spread bet would be tax-free, although losses cannot be offset against gains elsewhere. A contract for difference could be opened at similar levels and deliver similar returns, but any profits on these would be subject to capital gains tax.
