3 Smaller Companies with Global Revenues

Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and here with me today is Mike Prentis, Manager of the BlackRock Smaller Companies Trust (BRSC).

Hello Mike.

Mike Prentis: Hi Emma.

Wall: So, you're here today to give us three stock picks. What's the first stock you would like to highlight.

Prentis: Okay. I suppose looking around the world the economy we're most comfortable with is the U.S. So, my first pick really is a company which is almost entirely exposed to the U.S. economy and it's a company called 4imprint (FOUR), with a four at the front of it. What it does, it supplies promotional products to corporates around America.

So, corporates can go on to its website and choose a whole variety of promotional products, umbrellas, T-shirts, whatever they want to get their logos on them and 4imprint organizes all of that and then supply to their customers or proposed customers.

So, it's a very simple business. The revenues are over $400 million, have been growing very strongly, 25% plus last year, accelerating if anything and the nice thing about this company is it's very cash generative. So, it can pay good dividends.

Wall: I think that's quite a surprise for some investors who are perhaps not familiar with that well because we would think that perhaps businesses would be moving towards pure digital marketing. The idea of handing someone branded merchandise seems pretty Eighties, but it seems to be doing well.

Prentis: Yes. Their product range is huge. So, I'm sure they can supply all sorts of digital merchandise as well for companies if that's wanted.

Wall: What's the second stock today?

Prentis: The second one is looking at Europe actually and the potential for Continental European recovery in time which we think will come and we've seen some corporates just starting to talk about a bit of an improvement in some of their mainland European operations.

So, the second company is Northgate (NTG) which is a van rental company, really operates in actually the U.K. and Spain and so it's a slight co-part in a way because it doesn't involve Germany and France, clearly the two major powerhouses in Europe which are slightly behind some of the other countries. Spain is actually doing quite well. We've seen the PMI data recently. And Northgate itself is performing very nice.

We had an excellent with the management, they are very upbeat, they are seeing good profit growth. This is a business which was very, very profitable a number of years ago. So, the profits are still very much in a recovery phase and the shares are not expensive and we feel there is a good bid for us to go.

Wall: Is this a stock that is going to best placed to benefit from the QE now flooding the Eurozone?

Prentis: Well, I think that will probably help. I am not entirely convinced that QE is going to make a massive difference, but it's not going to be a negative for a company like Northgate.

Wall: What's the third stock then?

Prentis: The third stock again to pick is an entirely U.K. exposed stock and a U.K. consumer company. We think that many U.K. consumer companies will do fine despite the election coming up. Although the one I have picked is a real structural growth story. It's a company called CVS Group (CVSG) who run the largest group of veterinary surgeries in the U.K., about 250 roughly, all around the country.

In fact, my local veterinary surgery in my village is a CVS practice now. So the nice thing is for the vet running it is that she can look after the animals and the CVS systems are implemented throughout the business, as they are throughout the whole of CVS. She can benefit from CVS' buying power. All the drugs they need to get, CVS has much better buying power than she did as an independent practice.

CVS also have a Healthy Pet Club which people can subscriber to. In fact, we have subscribed to it and pay money every month into this club. It has a very good source of predictable revenue and it entitles you to get certain sort of treatments a little bit more cheaply, let's say. So, it's a business which has developed very nicely, partly by acquisition, by lots of small practices being acquired, sensible prices added onto their network. This is efficient process. Actually, the service they are offering now is allowing them to get good revenues.

So, like-for-like sales growth is going up at about 6% per annum. So, it's a nice business. It's a structural business, very defensive I feel capable of being significantly larger than it currently is and run by really an excellent entrepreneurial chief executive.

Wall: Presumably, this sort of business is really dependent on the economy and the consumer feeling confident in the economy. I imagine when we were sort of in the depths of recession perhaps things unfortunately like paying top-notch pet care was not on the top of people's priorities. However, are you confident we've come far enough with the U.K. economy that this is sustainable?

Prentis: Yes. I mean, I would say that this is not paying top-notch care costs for your cats and dogs. The aim is to provide very competitively priced veterinary care. And I think on the whole people who have got dogs and cats, their key companions in some cases, look after them and it's one of the things that they are not prepared to stint on too much. But you're right, there is a degree of cyclicality, but it's not as strong in many businesses and I feel this is very much a structural story more than a cyclical story about the business becoming much larger across the U.K. in time.

Wall: So, people would rather downgrade their grocery shopping rather than their pet care?

Prentis: Yes, I think probably buy some cheaper ingredients or not throw away so much food, for instance.

Wall: Mike, thank you very much.

Prentis: Thanks Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.