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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Mr Fletcher died years ago, and Messrs Shepherd, Cooper and Thatcher are nearly extinct. Master Baker can still sometimes rise to the occasion, though.
Surnames often reflect trades from the past and remind us of how times change.
When I was at school, I was periodically asked what I thought I would do when I grew up. At 10 I intended to be a spy (the James Bond films were a highlight of my childhood) or a priest (no idea). At secondary school I said something about acting. And then I had a career aptitude test. The recommendation came back: “Banking or accountancy for you, boy.” My dreams of a West End stage appearance were shattered.
The world can change quickly — it feels today that it is changing faster than ever. Usually, it is driven by technology. Cars made saddlers redundant; farm machinery did it for many agricultural labourers; and digital finance has seen off many of those banking jobs my careers teacher earmarked me for.
If jobs are changing then, of course, so are companies. Looking at the original FT 30 constituents from 1935, the index includes Bolsover Colliery, five car manufacturers (Austin, British Leyland, British Motor Corporation, Wolseley and Morris), several thread, yarn and textile firms and Woolworths. Evidence there, if you need it, that there are few buy-and-hold-forever stocks.
What is more interesting to me is how some of the survivors have evolved. WPP started out as “Wire & Plastic Products”. It was bought by Martin Sorrell in 1985 and became an advertising group. Smiths was making wind-up clocks in 1935. Today, among other things, it manufactures the scanning equipment at airports.
Companies can evolve in several ways, perhaps most often through restructuring. It is common for larger businesses to be conglomerates, made up of divisions. Some of these are expanding; others are likely to be troubled. As investors seeking to place our money behind industries on the rise, we have to try to understand the detail. Balancing these contrasting elements is key to valuing a stock. But it is not simple.
Companies will talk up their best stories. You can overpay for shares if you do not factor in the negative drag from the problem areas. On the other hand, it is possible for the market to become so obsessed with problems and dull stories that we miss the potential.
For instance, I own shares in Stryker, the US healthcare company. I believe its robotic surgery division would attract a very high multiple if it were quoted on its own, but the better-known division that makes hospital beds keeps the valuation of the whole down to earth.
Where you believe there is an exciting valuation gap you want to know what management is doing to realise that hidden value. Managers are not stupid. They know full well which business lines are winners and which are needless distractions.
Often the reason investors cannot see a business’s potential is because there is too much junk in the way. Disposals can help a company focus on its core business — and be good for everyone. It need not be just the problem children put up for adoption. For example, after nearly a century making lightbulbs, Siemens sold off its lighting division, Osram Licht, in 2013.
That disposal helped Osram Licht, in turn, to sharpen its focus. It sold off its traditional lamps business to concentrate on the market for infrared products and a component used in smartphones to scan human irises. These spin-offs can be attractive investments in their own right, though they might take time to settle. Osram shares rose from 24 euros to more than 70 euros in just four years, though they have dimmed since.
Siemens has been through a lot of these disposals in the past few years. Gone are its phone, hearing aid and oven businesses. In March 2017 it spun off its healthcare business, as Siemens Healthineers (though it retains a 75 per cent shareholding). This seems another good example of allowing a subsidiary not being fully appreciated by the market to stand outside the parent company and focus fully on its own plans. At IPO its share price was €29; seven years later it is 70 per cent higher, at nearer €50. Not a bad return if you add in dividends. The Siemens share price has doubled in the same time.
When looking at demerged companies at flotation, pay particular attention to the launch balance sheet. A company might sell or spin off a division saddled with debt to leave its own balance sheet less burdened. Here I would cite Glaxo spinning out its consumer health business, Haleon, in 2022 with £10.7bn of debt.
Haleon is selling off slower-growth brands to help pay down that debt — so far this year its lip balm and nicotine replacement therapy businesses have gone. While its core brands, Sensodyne and Panadol, are steady enough, the balance sheet still seems unnaturally stretched to me.
Generally, over the past 10 years markets have been disappointed by how effective companies have been at restructuring. There may be a will from management, but not a way. It can be expensive to cut costs in lossmaking areas, as Volkswagen is finding in Germany, where union agreements make it hard to axe jobs and close plants.
Often it takes a new management team to have the courage and support to shake things up. A change of manager can lift a business, but often it is best to hold a while before you jump in and buy the shares. The new management may do an asset writedown, as Philips did last year. They try to get all the bad news out of the way quickly, and it can lead to big share price drops.
That can be the best time to buy shares. These are dangerous moments. A restructure may not work, but if it does you can see significant benefits.
Simon Edelsten is a former professional fund manager. He owns shares in Stryker
