Star performer, almost certain to sell

Battery and rugged computer distributor Solid State is doing something right. It's the Thrifty 30's strongest performer and its results, published in July for the year ending March 31, were the best in the seven years covered by the reports published on the Solid State website.

An update in September reported trading significantly ahead of the same period last year, and a record order book although the company equivocated slightly by remarking the Board is mindful of the broader economic environment and the, presumably negative, impact it may have.

Here's the seven year spreadsheet and some highlights, not the ones you'll read on the face of the preliminary announcement, but more pertinent ones perhaps to the long-term investor:

• Since 2005, the company has grown shareholder wealth (the accounting value of the company plus cumulative dividends) at a compound annual growth rate of 13%.

• Return on equity in 2011 was 25%, almost twice the seven year median

• A net profit margin of 4.6% compares to a seven year median of 3.1%. The other components of ROE (profitability), asset turnover and leverage were close to their averages.

The only troubling performance statistic is free cash flow return on equity (0%). Solid State looks like its spending cash like a drunk in a pub, but actually since its mostly going on inventory and extending trade credit to customers shareholders should get it all back and more if demand stays strong, and when customers pay up. Turnover rose 57% so the figures probably show Solid State spending money to meet demand.

There is another troubling statistic, though. Because Solid State has performed so well, the share price has more than doubled, which is a good thing, but it does leave the company looking pricey. Taking the median ROE of about 13% and dividing it by the price to book value of 1.75 we get an earnings yield, a hypothetical return in earnings, of about 7.5% on the current share price. If I was thinking about adding the shares to the portfolio I probably wouldn't, as I look for at least 10%. Solid State has achieved the potential I recognised, and in less than time than I hoped.

Not bad for an IT distributor, particularly when you consider the plight of Northamber, the portfolio's other box shifter,a company finding it so difficult to profit it's eating its own fat.

Solid State has been investing its fat, diversifying from supplying components into its new niche, industrial computing. As Northamber re-examines its business model, it could perhaps learn something from Solid State.

Arguably the latest results demonstrate Solid State is an improved company now, and profitability will be consistently higher in future. But I don't like to base my investments on a particular vision of the future, it often doesn't work out the way we expect. So I shall probably eject Solid State from the portfolio.

I'm hesitating because I'm going to take a closer look its annual report. It might help me with my appraisal of Northamber, and, it's unlikely, but I might see something that changes my mind.