The long haul looks just as nice. Since 1990, sales have quintupled and pre-tax profits to 2013 have risen at almost the same pace (and, as of 2011-12's higher full-year figures, had risen by almost six times); EPS has risen 5.4 times (as of 2011-12, by just over six times). In large part, EPS was helped by the absence of diluting share issues. Excluding scrips issues, the company has increased its equity capital by less than 6 per cent in the 23-year period. In other words, all of its growth has been internally generated.
And yet the company in question operates in one of the dullest industries imaginable, where growth is tied to the anaemic pace of change in western Europe's output; where competitive forces are keen; where orders come and go at short notice and where pricing power is variable.
The company deserves a name. It is Castings (CGS) and its business - crudely speaking - is metal bashing. Castings is one of the remnants of the Black Country's heavy industry, although it is based in Walsall, on the edge of the Black Country. As its name implies, its business is supplying moulded iron castings and machined parts, mostly to western Europe's automotive industry.
When I first stumbled across Castings in the late 1980s it had an arrestingly high return on equity - comfortably clear of 20 per cent - and that return remains enviable - about 15 per cent in 2012-13. It is one of the few companies where you can state return on capital figures with confidence because its accounts are so clean. Over the years they have barely been disturbed by the acquisitions, disposals, write-offs and all the accounting rigmarole that accompanies modern corporate life. The simplicity and clarity of the accounts reflect the simplicity and clarity of the business - just three operational companies, working on three sites; two foundries and one machining shop.
Quite how Castings has been so successful in so unpromising an industry for so many years is difficult to pinpoint, although clearly its chairman has much to do with it. Brian Cooke joined Castings in 1960 - the year the company got its London listing - was its managing director from 1968 to 2007 and has been the chairman since then. And it would be false to say its success has gone unnoticed. Since 1990 the rise in the share price has compounded at 9.2 per cent a year; over the same period, the All-Share index has risen by just 5.1 per cent a year.
Which brings me to the bad news. The surge in the share price - especially over the past 12 months (up 46 per cent) - means the price is well ahead of events. True, Castings' rating - 12 times 2013-4's forecast earnings - might not sound too demanding, but I would say it's feasible the share price could halve in the coming two to three years.
This is based on the long-term correlation between the Castings' share price and the company's value-added per employee. That metric is cash profits (operating profit plus depreciation) divided by the average number of employees during a year. For the year to the end March 2013, employee value-added dropped to £24,827 from 2011-12's all-time high of £26,672 and it coincided with an end-March share price of 342p. Even that correlation was above the long-term regression line of the share price against employee value-added. Yet since then the share price has risen 25 per cent to its current 427p. In order to justify that price, employee value-added should be heading clear of £35,000 in 2013-14. It won't come close and, most likely, it's heading down for the second year running as Castings has had to hire employees at short notice to meet exceptional demand, which has now faded.
The previous time the share price was so far above the trend line was in March 1997 when it touched 250p. That presaged a three-year bear market in the stock during which time its price halved, taking it far below the trend. And this indicator is worth taking seriously. The 'R-squared' equation, which calculates how well the trend line fits the data points, suggests that employee value-added predicts 75 per sent of the changes in the share price. That's a scarily high proportion.
● Let's clear up business from last week and, again, we're talking about correlations. This time it's the link between the Norwegian krone and the price of oil. Where the oil price goes, the krone follows. The krone/sterling exchange rate has pretty well moved in lock-step with Brent crude since 2008, although the oil price is more volatile. Given that oil and gas exports account for over 20 per cent of Norway's national output, that seems reasonable, but it undermines the logic for having holdings in both in the Bearbull Global Fund. So ETF Norwegian krone (GBNO) is being axed to make way for Lyxor CSI 300 (CSIL), the China exchange-traded fund I discussed last week.
