Value and growth investors should look at McMillan Shakespeare now

A one-off bad news story may be your door of opportunity.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The salary packaging and vehicle fleet management company McMillan Shakespeare (ASX: MMS) announced a gain in revenue and profit for 2013, although after the 30 June balance date, a Labor government proposal shook the company’s future earnings, causing its share price to plummet 55% in mid July.

Revenue rose 8.9% from $300.6 million to $327.4 million, and net profits went from $54.3 million to $62.16 — up 14.5%. Earnings per share were $0.82, yet no final dividend was declared due to the uncertainty of future earnings based on the proposed legislative changes to Fringe Benefits Tax calculations.

The company has two major segments — Group Remuneration Services and Asset Management — which are around 50% each in total revenue. However, earnings of group remuneration are about 76% of total earnings, or three times that of asset management.

Understanding how the company makes a majority of its profits also explains why the proposed legislation was a one-two punch to future business. It is not a finance company for vehicle leasing, but it gets its revenue from finance, insurance and ancillary commission revenue when a novated lease is settled.

Then, over the life of the novated lease, it gets further income from such things as salary packaging fees and fleet management fees, as well as trailing finance commissions.

Since many of its customers are government agencies, hospitals, charities and private sector businesses, the extent of its income streams are diverse and extensive, which is why company profits have risen from less than $1 million in 2004 to $62.16 million in 2013.

Net profit margin was at 19%, usually more in recent years, and return on equity over 30%. This a value and growth investor’s dream — strong, stable earnings with high profit margins with connections to large private and public organisations.

Enter the Labor government. In mid-July, the government announced proposed legislation that would change the Fringe Benefits Tax calculations for vehicles under novated leases, taking away the tax advantages companies and employees enjoyed as part of salary packaging.

The company still is trying to estimate the total effect it will have on future earnings because if the legislative changes come to bear on its business, their customers may reduce their levels of fleet financing and management, and vehicle procurement may become the employee’s individual responsibility.

With the share price suddenly down from $18 to $8 in about 10 days, investors who believed the Labor government will lose in the next election, and, therefore, the legislation wasn’t worth the paper it was written on, got a 55% discount on a great money earner. The company went through its own little “GFC”, and the rock bottom price allowed an entry for savvy investors.

The share price has already recovered to $12, and as Labor looks much less likely to win the election, the company may be back to where it was before too long.

Foolish takeaway

This is a classic Warren Buffett-style investment story, a wonderful company making money hand over fist that hits a big pothole of short-term business distress, but still comes out with its core business intact. An investor who knows the company story would have seen this as a time to “buy a dollar for 70 cents”, but in this case the going price was 44 cents. At this price point, your margin of safety for future potential downturns has already been priced in, so if the stock took another big dive, you still would be in the black.

Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »