US Edition
While the UK is currently in recession, the US economy is rapidly expanding. In the past two quarters, for example, it has grown at an annualised rate of 4.9pc and 3.2pc, respectively. It is expected to expand by 2.1pc this year, according to the IMF, with the UK economy set to grow by a rather paltry 0.6pc.
Although this column is bullish about the UK’s long-term economic prospects as inflation falls and interest rate cuts are implemented, having exposure to the US within an investment portfolio is a sensible move. As well as providing access to attractive growth opportunities, diversifying via companies with sizeable operations in the US and elsewhere also reduces overall risk.
For example, our inheritance tax (IHT) portfolio holding Sanderson Design continues to benefit from its increasing exposure to the fast-growing US economy.
The wallpaper and fabrics company’s recently released full-year trading update showed that North America was the only geographical segment in which it posted positive revenue growth, with sales of its various brands in the region rising by 8.2pc.
This compares with an 11pc decline in sales of its brands in the UK as a weak consumer environment weighed on performance.
The firm’s manufacturing sales fell by 10.3pc but this was more than offset by a 67.7pc rise in licence revenue. Its growth is particularly encouraging for the company’s investors because it offers relatively high margins. Alongside exposure to the rapidly expanding US market, licensing is now a key growth area for the business that has the potential to push profits higher during what is proving to be a tough period for the wider sector.
Of course, the UK’s economic prospects are highly likely to significantly improve. A looser monetary policy is set to catalyse GDP growth, while lower inflation means the outlook for consumer spending is increasingly upbeat. This should create stronger operating conditions for Sanderson Design, with a similar outlook for Europe and the world economy likely to boost its financial performance.
In the meantime, the company has sufficient financial strength to overcome a challenging period across several of its key markets. Its net cash position increased slightly year-on-year so that it stands at around £16m. And with its shares currently trading on a forward price-to-earnings ratio of around 8, investors appear to have adequately factored in short-term risks facing the business.
Having risen by 22pc since being added to our IHT portfolio in January 2019, the stock has outperformed the FTSE Aim All-Share index by around 46 percentage points.
It has also paid dividends amounting to 13pc of our notional purchase price, although a modest yield of 3.3pc does not make it an obvious income opportunity.
However, since the company continues to offer a wide margin of safety, benefits from growth potential across its key markets and has a solid balance sheet, it remains a worthwhile long-term holding.
Questor says: hold
Ticker: SDG
Share price at close: 101.5p
Update: Craneware
Hospital software company Craneware’s recently released half-year results showed it is on track to meet financial guidance for the full year. The US-focused firm recorded an 8pc rise in both revenue and pre-tax profits during the six-month period as operating conditions improved.
Its customer retention rate remained high at over 90pc, while annual recurring revenue grew by 3pc. Having had a modest net debt position at the time of its full-year results, the firm now has a net cash position of over $4m (£3.1m). This means it has scope to make acquisitions and invest in research & development.
Investors have responded positively to Craneware’s improving financial performance. Its shares have risen by 28pc since the start of the year and are now up by 26pc since being added to our IHT portfolio in January 2018. In doing so, they have outperformed the FTSE Aim All-Share index by 57 percentage points. They have also paid dividends amounting to 10pc of our notional purchase price.
Trading on a forward price-to-earnings ratio of around 31, the company’s shares remain relatively expensive given that a wide range of small-cap stocks currently offer substantial margins of safety. However, with an improving operating outlook, a sound financial position and the visibility offered by an increasing proportion of revenues being recurring, the company will remain a holding in our IHT portfolio.
Questor says: hold
Ticker: CRW
Share price at close: £22.00
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