Portfolio manager Nick Train (who is often referred to as ‘Britain’s Warren Buffett’) is generally regarded as one of the UK’s top stock pickers. Over the last decade, his funds have smashed the market by a wide margin.
Recently, it was revealed that Train has added a new UK stock to his portfolios (his first such purchase since 2010). Given his incredible track record, should I follow him and buy it for my own portfolio?
FTSE 250 stock
The stock that I’m referring to is FTSE 250 consumer goods firm PZ Cussons (LSE: PZC), which owns a number of well-known brands such as Imperial Leather and Original Source. Given Train’s focus on brands within his portfolios (he owns a number of companies that have very strong brand power including Unilever, Diageo, and Heineken) I can understand why he sees appeal in the £894m market-cap company.
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Looking at PZC’s recent share price action, it appears that a number of investors have already bought the stock after hearing about Train’s purchase. But does it meet my own investment criteria?
Revenue growth
One of the first things I look for in a stock, whether it’s a dividend stock or a growth one, is revenue growth. Without revenue growth, it’s a struggle to increase earnings and dividends – which has implications for share price expansion.
Looking at PZC’s revenue growth, I can’t say that I’m impressed. As you can see in the table below, over the last few years, revenue has been trending down, and analysts expect a further drop this year.
| Year (to 31 May) | 2016 | 2017 | 2018 | 2019 | 2020 (e) |
| Revenue (£m) | 821 | 809 | 740 | 689 | 653 |
Profitability
In a recent trading update, the group told investors that “challenging market conditions across key geographies led to a decline in first-half revenue and operating profit compared with last year.”
After revenue growth, I tend to take a look at profitability as I like companies that are highly profitable. I look at metrics such as return on equity (ROE), and operating margin. What concerns me here is that both of these metrics have deteriorated recently. That’s not a good sign.
| Year (to 31 May) | 2016 | 2017 | 2018 | 2019 |
| Operating margin | 10.9 | 11.2 | 8.8 | 6.3 |
| Return on equity | 14.2 | 13.5 | 9.1 | 6.1 |
I’ll also point out that analysts are downgrading their earnings forecasts for this year, which is not ideal.
Dividend growth
When it comes to dividend stocks, one of the first things I look at after the yield (which is about 4% here) is the dividend growth track record. I like to see at least four consecutive increases. Again, I can’t say that I’m overly impressed here. Over the last three years, PZC has paid three identical payments of 8.28p per share. Often, a dividend freeze leads to a dividend cut.
| Year (to 31 May) | 2016 | 2017 | 2018 | 2019 | 2020 (e) |
| Dividends (p) | 8.11 | 8.28 | 8.28 | 8.28 | 8.31 |
Valuation
Finally, turning to the valuation, PZC currently trades on a forward-looking P/E ratio of 17.1. I see that as a little expensive, given the company’s recent performance.
Should I buy?
All things considered, I’m going to leave PZ Cussons alone for now. While the stock could turn out to be a good long-term investment for Train, I think there are better stocks to buy right now.
