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Our exposure to manufacturing company Carclo (CAR) came at the end of a protracted period of extensive restructuring and rationalisation. Indeed, any company which boasted the niche area of operation that Carclo did as well as the prospect of expanding through a number of frontiers on which it could commercialise these ‘specialisms’, warranted more than a second look.
Since listing in 1988 Carclo had grown steadily through a series of astute acquisitions and as a result was one of the market's best performing stocks throughout the early to mid 1990's. After trading at 100p at the beginning of the 1990's the shares more than trebled to an all time high of 332p in 1996. However, following this stellar run the shares entered a protracted bear market that lasted seven years.
The companies impressive move through the 1990’s was halted by an ill timed major strategic change in 2000 in which the group exited steel operations to focus on plastics mouldings. However, as the mobile phone market and technology sector recovered so did Carclo’s prospects.
It was the recognition of this which lead to our recommendation of the shares in January 2005 at 50p. Upon entry we noted that the company had its operations in the UK, Europe, the US and, importantly, emerging superpower China. Such a diverse geography was central to our decision.
A far cry from today’s picture, a robust automotive industry underpinned a large degree of Carclo’s strength. Robust demand for specialist lighting from carmakers such as Mercedes, Porsche and Bentley all played their part.
Furthermore, balance sheet strength laid the foundations and the much heralded emergence of 'Conductive Inkjet Technology' (CIT) provided share holders with plenty of potential upside.
However, as fears over a global downturn gathered pace during the summer, the UK manufacturing sector’s malaise outweighed all the positive developments and we decided to sell at 80p in July. Indeed in May, industrial output fell 0.8 percent and the situation has not got any brighter thereafter.
In addition, the once positive automotive industry began to slow. Sales of vehicles in the US dropped to a 15 year low in June whilst in the UK, the UK the Society of Motor Manufacturers and Traders reported new vehicle sales down by 12 percent during the opening 6 months of the year.
Looking back our decision to recommend Carclo was vindicated by the company’s operational excellence and astute management. Indeed, looking ahead the company has prepared itself as best it can to face its imminent challenges. However, industry conditions can never be ignored no matter how well a company’s specific fundamentals stack.
Despite undoubted ongoing technological innovation, management in our view were unable to reduce the group’s exposure to fragile markets quick enough and we felt it prudent to exit our position with a gain of 70.6 percent.
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Another manufacturing company that we decided to exit was Castings (CGS), one of Europe's leading foundry groups.
The company manufactures the ductile, malleable and grey iron castings for brackets used in the Automobile, Rail, Agriculture and General Engineering sectors.
Members will be aware, that central to the Fat Prophets ethos is the discovery of companies which have been overlooked or are very much out of favour with the market. Castings was one such example.
The company’s margins were being squeezed by increasing raw materials costs, and tight customer demand. However an iron-clad balance sheet and excessive negative share price action provided an excellent opportunity to gain exposure to this well-managed company at an undemanding valuation. So during February 2004 we recommended Castings to Members at £1.68
Another major plus was the fact that Castings’ asset backing was incredibly sound. The company boasted no intangibles, zero term debt and cash of around £23 million on the balance sheet at 30 September 2003 (shortly before our entry).
However, when group Chairman Brian Cooke was unable to provide forecasts for 2009, a red flag was raised we felt it was more than prudent for Members to exit. Indeed, unsurprisingly the shares fell by around 40 percent suring teh latter half of the year, underlining the importance of our quick decision.
Spiraling cost pressures were giving management plenty of headaches and despite resilient performance in the wake of a weakening UK manufacturing scene, banking a 73 percent absolute return (including dividends) on our original recommendation seemed a reasonable move.
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