By Doyl Smith, Contributor 
Smith
THE WORLD'S greatest investor, Warren Buffet, once said, "Buy companies with strong histories of profitability and with a dominant business franchise." The rationale behind the statement is these companies should be able to achieve solid results for their shareholders year in year out. Below is a list of the companies by sector that we believe meet this criteria and that should have the best growth in their respective sectors for 2005.
THE COMMUNICATIONS SECTOR
Radio Jamaica Group: Radio Jamaica (RJR: 2004 share price growth 14 per cent) is one such company with a dominant brand. Through its ownership of several leading radio stations and one of the islands only two nationally-televised stations, RJR Communications Group is a major conduit for marketing to the Jamaican populace.
In addition to its islandwide broadcasting capabilities only TVJ and CVM, are legally authorised to accept advertisements from sponsors giving the two companies a legal, albeit not currently enforced, monopoly on television ads. RJR has made a profit every year for the past five years but the stock price has suffered over the past nine months as a result of several factors including the company's investments in upgrading its studio and transmission facilities and damage from hurricane Ivan.
Additionally, running two studios concurrently, to create as seamless as possible a transfer from the old studio to the new, increased company costs and negatively impacted profits. The new facilities are not only on par with international standards but RJR through TVJ's capabilities stretch from being able to transmit multiple channels wirelessly but also to transmit High Definition Television to a subscriber base.
The new studio is now fully operational and the company is already profitable once again. With the cash from a successful rights offer that will be used to pay down debt and other investments, RJR is poised for solid growth.
Gleaner: The Gleaner Company (GLNR: 2004 growth of 108 per cent) has scored consistent revenue growth of nearly 13 per cent per year over the past three years with actual revenues of $2 billion to date. Its profits have grown at an even faster pace as a result of cost containment resulting in average profit growth of 16 per cent in 2002 and 2003.
With profits for the company's nine months to date hitting $179 million, Gleaner has not only proven its ability to consistently grow profits but holds a dominant print franchise that it is now extending to Caribbean readers in England. The company is now extending its electronic presence through Power 106 which will further build its presence and influence.
CONGLOMERATES
Lascelles deMercado: Lascelles (LAS: 197 per cent growth for 2004) portfolio of companies includes an insurance arm, a BMW dealership, and the distribution of both consumer and pharmaceutical items. However, Lascelles derives 60 per cent of its revenues and profits from its wines and spirits division. Lascelles has been focusing on upgrading its operations, by investing in new technology and infrastructural upgrades to make its operations internationally competitive.
The company has continued to report strong revenue growth with total increase of 29 per cent ($16 billion) for 2004 resulting in a net profit increase of 60 per cent or $1.509 billion. Much of
this profit increase was also a result of cost containment in the last quarter as the company's high administrative and marketing costs were down from an average quarterly expense of over $1 billion to $253 million.
Lascelles also has upwards of 74 million shares of Carreras, making it one of the single largest shareholders in the company and the second-largest beneficiary of Carreras high-dividend payouts. The company has been reaping the rewards of its marketing investments and is probably looking to reduce its overall marketing expenditure so that more revenues can flow to the bottom line.
Pan Jam: Pan Jam (PJAM: 185 per cent growth in 2004) is a diversified conglomerate with investments ranging from spices (it owns Busha Browne) to real estate. The conglomerate has a relatively low price to earnings ratio and has been undervalued for some time.
The company is in the enviable position of awaiting final approval that it owns through its First Life subsidiary a 20 per cent stake in Life of Jamaica (LoJ). With expectations for LoJ being a major profit generator for 2005 an investment in Pan Jam is a low cost way of benefiting from LoJ's results. In addition, revenues from First Life's prime commercial real estate portfolio is expected to be strong for the foreseeable future further growing its profitable bottom line.
MANUFACTURING
Jamaica Broilers: The main supplier of poultry in the island, Jamaica Broilers Group (JBG: 181 per cent growth in 2004) is one of the success stories of the manufacturing sector. Racked by dumped chicken parts in the nineties, the company sought and gained duty protection that has allowed it to invest in its plant and facilities and 'clean up' its balance sheet.
The company is currently in effect debt free and has only one major competitor.
Hurricane Ivan recently underscored the renewed strength of the Broilers Group. In 1988, when Hurricane Gilbert hit Jamaica, JBG lost over 80 per cent of its chicken stock and suffered significant damage to its production capabilities. After Hurricane Ivan, JBG reported that it lost just 30 per cent of its chicken supplies and had no downtime on any of its cold storage facilities.
Additionally, the company revealed that it is insured against any losses including business interruption and loss of revenue from a hurricane or natural disaster. With a twelve-week period to maturity for its chickens, Jamaica Broilers has already replaced any chicken stock lost in the hurricane.
Although the fishery division amounts for just $293 million of the company's $8 billion dollar annual revenues, it has been recording several notable successes by getting its fish fillets into overseas markets including Wendy's, Puerto Rico. This bodes well for the future of the company's exports.
Jamaica Broilers Group currently trades at a relatively low P/E compared to the industry average and should see the positive effects of a growing economy since poultry products are an unofficial part of the national dish.
Caribbean Cement Company: Caribbean Cement Co. (CCC: 268 growth in 2004) has just come out of a period of uncertainty with regard to its competitive future. The company successfully argued the case that the imported cement shipments were dumped cement leading to an anti-dumping commission ruling in its favour. The Government of Jamaica responded with an import charge in excess of 40 per cent on all imported cement into the island.
With this duty protection, CCC will be making investments of over US$100 million to further strengthen its cost position in the region. In addition, as part of the company's strategy to streamline its direct costs, it has been aggressively developing the use of coal as a cheaper, alternative source of energy for use in production.
Both the formal and informal sectors of the economy have been recording strong demand for cement and with large hotel and highway projects still either in progress or to come on-stream, the high consumption projections for cement should hold. While its P/E of 22 is in excess of the industry average of 19, this should come down as the profit figures begin to increase as a result of increased sales."
FINANCE
Bank of Nova Scotia: Bank of Nova Scotia (BNS: 2004 growth 137 per cent) remains the market leader, of the six commercial banks operating locally. It has maintained consistent profitability, balance sheet liquidity, stable asset quality and its stable core deposit base has provided the bank with a steady, low-cost funding source. BNS continues to display consistent control of its costs, maintaining a productivity ratio of 49.46 per cent (international standard is 60 per cent. Lower is better for this ratio).
We expect non-interest expenses to grow, albeit slowly, throughout 2005 due to the bank's initiative to enhance customer service and introduce new products. We also expect that the bank will continue to grow its other revenue streams including its loan portfolio as it shifts funds in the current low interest rate environment. Expectations are that for any large-scale borrowing for projects that will be launched, BNS will undoubtedly be on the short list as a lender of choice.
The company's earnings of $5.8 billion in absolute terms are still strong and though impacted by the falloff in income from securities line item on the profit and loss statements, it seems poised to continue doing very well over the year. Within its sector, the P/E is roughly 20 times earnings, the current P/E of 14.6 seems to be quite a good value.
BNS has paid a dividend of 1.85 cents per share for a respectable dividend yield of 3.19 per cent, in 2004. With the proposed one-for-one share offer, the price of the stock should become more attractive for the average retail investor. We expect this offer to be a positive one for the stock and that the dividend yield will continue to be strong with profits increasing in the coming quarters.
While these recommendations are for stocks that should outperform the overall market in 2005, as with all investments, consult with a registered financial adviser who can provide more personalised guidance with respect to the levels of risk that may be involved with any equity purchase. A financial adviser would also be able to offer advice bearing in mind your current portfolio, individual risk tolerance and investment objectives.
* Doyl Smith is a registered investment advisor with JMMB Securities, He is professionally qualified with an MBA and has interned with Merrill Lynch, the largest investment bank and brokerage house on Wall Street.
