Textile rental, laundry service and workwear provider Johnson Service Group (LSE: JSG) has come a long way since its operational problems of 13 or so years ago. Back then, although most divisions were performing well, the firm’s Stalbridge business was losing money. The directors thought the recovery programme of the time would take longer to execute than they previously thought, which led to a profit warning.
Why am I bothering to mention such ancient history? Because the share price collapsed on the news, which more or less arrived just before last decade’s credit-crunch. Many will be wondering whether the stock is likely to plunge again if we see another general economic slowdown.
Recovery and growth
But Johnson did sort out its operational problems and has been posting pleasing trading and financial figures for a long time. The six-year record shows generally rising revenue and steady annual advances in normalised earnings per share, operating cash flow, and in the dividend.
My read of the situation is that the operational problems materialised before the general slowdown induced by the credit crisis. Indeed, when the economy was apparently booming, Stalbridge was losing money, so I think the problems were internal. Yet the post-credit-crunch stock market was an unforgiving environment for all shares, and it’s possible that the fall in the share price went too far.
I reckon there’s a high degree of repeat trade in the firm’s operations. Yet, if there’s another big general economic slump, Johnson’s catering and hospitality markets will suffer and I’d expect the shares to ease back. However, I’m optimistic that the fall will not be as dramatic as the last time the share price plunged. Since the nadir in 2009, the stock has climbed back up by more than 1,200%, which is an impressive recovery. But I think it would be folly to ignore the cyclical risks going forward.
A positive outlook
Today’s full-year results reveal more decent adjusted figures. Revenue from continuing operations rose 10.4% compared to the previous year and adjusted diluted earnings per share lifted 6.9%. The directors expressed their ongoing confidence in the outlook by pushing up the total dividend for the year by a tasty 10.7%.
Organic revenue advanced 7.8% in 2018 with the balance of the total gain coming from acquisitions. I wrote back in January that a sustained programme of acquisitions has “led to the firm acting as something of a consolidator in what was previously a fragmented market.” Chief executive Peter Egan explained in the report that Johnson’s strategy is to invest in operations to develop new capacity and drive “the quality of growth organically” alongside selective acquisitions, which expand the firm’s geographical coverage.
Operational problems are a distant memory and the company’s quality indicators are now impressive, with the return-on-capital figure running near 13% and the operating margin at about 12%. There’s a lot to like about Johnson service and I remain tempted to hop aboard the growth story to collect that expanding dividend, despite being a little nervous about the inherent cyclicality in the sector.
