I've held Tricorn in my portfolio since May of this year, and the shares spiked at a price about 70% above my buying price in late September. I had a look and decided to continue to hold then; a decision I might come to regret as the shares drifted down from that week-long peak, and dropped further upon the release of their results this week. They now sit at 28p. As ever, then, the question is how to interpret the drop and results; is it an attractive entry point forged by market misunderstanding, a worrying turn of events, or - and this should always be the default option - the market pricing in the news.
Having spoken to Tricorn's management before, I got an email from their nominated adviser and broker asking if I wanted to have a brief chat once again (prior to the results, I should note), which sounded, as always, like a nice chance to get their take on events. I'll present this post as a sort of two-parter, then; I'll briefly talk about my gut, immediate reaction to the results, and then talk about what management said by way of explanation.
There's not really any escaping the fact that the headline figures are pretty bad; net debt is up to £3.6m (when I first talked about them I pondered what they were going to do with a £3m cash pile!). Revenue is up 15%, and gross profits are up with that, but a far higher level of operating costs means that the company posted a £.281m operating loss and a £.324m loss before tax in the first half of the year. This is a non-trivial loss for a group with a market cap of sub £20m and net tangible assets of about £6.5m. It's also over £1m worse than last year's figures.Continue reading
Debts and deliberations
Leading directly on from here
When is a debt not a debt?
When it's a sundry debt, of course. Businesses invariably have lots of obligations, and the figures they publish for 'net debt' usually only focus on one of these - actual, formalised borrowings through a bank or bond issuance or somesuch. There are other obligations which are highly relevant to a company, though, and the simple fact of the matter is that when you put a company on a finite lifespan - you stop thinking they'll be able to roll over debt in perpuity, and start thinking about the number of people who need to be paid off before equity holders in the pecking order - they become far more relevant.
In Trinity Mirror's case, this big obligation is the large pension deficit - at about £300m, it amounts to a figure about two thirds of the company's current market cap. This is clearly material, since it represents £300m of cashflows which must go to funding this commitment before equity holders get their cash. If we said last time that we thought the company's short-term profit potential was probably about £100m, trending downwards, we have at least 3 years cash flow consumed already. If the business is indeed declining, this has pretty stark effects on any sort of discounted cash flow analysis you do, though the timing is obviously critical (in this case the timing is detrimental; dividends must be matched by pension payments)
What's the get-out clause? Well; pension deficits aren't really like bank borrowings, in that you are obliged to pay X by Y date. They're guesses - the best guesses of committees who attempt to conservatively ensure that the employees in the scheme have a sufficient pool of capital to draw down through their later life. Obviously, there are lots of assumptions that go into this; life expectancy (about 90, slightly over for women and under for men, which always struck me as rather high), expectations of future returns on assets, and the rate at which you discount them. I'm not going to go into all of this again, but the annual report hints at it: "It is clear that a change in the financial markets over the coming years, in particular an increase in long-term interest rates, could have a material beneficial impact on our pension scheme obligations".Continue reading
The only way is up
Trinity Mirror shares have been in the portfolio a little over a year now (writing that always sobers me up, since it inevitably feels like yesterday..) and, for the most part, they've offered me little trouble. My reasons for holding remained intact: operating results were excellent and the noisy newsflow sort of came with the territory and was, I thought, priced in. At long last, though, I think I should probably do them some justice and cast my eyes back over the stock.
The main catalyst for that, as ever, is the price. Frankly, I don't look at the shares I own very often. Since there's only two things that change my buy/sell decision - my analysis of the business's fundamental prospects, and the price I'm paying for those prospects - I only really give companies a proper look at important RNSs (trading updates and so on) and when the share price has lurched one way or the other without a corresponding change in the fundamentals. Trinity Mirror, for their part, have seen their share price more or less quadruple in my holding period. You might ask why it's taken so long for me to reconsider, then; the answer to this is simple. The company, distressed as it was viewed, was trading at a market cap of not far off £100m. Given that their cash generation probably sits at about £100m/y (though, granted, trending down), it only takes a year of them operating 'normally' to earn their entire market cap. The fact that they did so last year and since - they basically toodled along as they had done in the past, paying down £150m of debt in the process, means two things for the company. Firstly, it seems unlikely that a business valued at £100m one year will still be valued at £100m next year if they paid down £150m in the interim; unless you assume this represents a virtual cliff, and profits will now disappear, it presents a significantly safer prospect. Secondly, though, it gives investors confidence going forward. It's not just the £150m that makes the difference - it's the fact they're still able to make that money, the positive readthroughs for future cash flow.
Now, though, the past is irrelevant - and so I analyse Trinity Mirror as if I had no involvement with it in the past. How do I feel about it at the current price?Continue reading
Tickboxes and question marks
I'll confess up front: I have a bit of a bias against marketing agencies. While I've invested in one - Creston - I'm still on the fence about it, and its inclusion and survival in the portfolio is probably more attributable to it bumbling along around the same share price and not grabbing my attention more than anything else. That's a terrible reason, of course - endeavour to not be like me. In the interests of being open and honest, though, I'll try and quantify my bias. You can then decide if I'm being fair or not and - more importantly - I can appraise Mission Marketing, a reasonably cheap looking company, in as balanced a way as possible.
Before I get on to the more quantifiable stuff, I'll indulge my tabloid side. Here're some snippets from the Chairman's Statement with Mission's recent interim results:
We've got a really nice business here... Our strategy is not driven by brobdingnagian principles; it is quite simply to excel in whatever we do... ... Perhaps this is due to peniaphobia but more likely it stems from a passion to establish the missiontm as the most respected and regarded Agency group in the UK.
I defy anyone who can read that and not raise at least an eyebrow. Perhaps I'm just lacking in grey matter, but I don't like having to look up words in interim results. Maybe he's just trying to liven things up - call me Scrooge, but I like the reporting of results to be as straightforward, user friendly and unbiasedly factual as possible.
On to the more relevant stuff, though. Why am I always a bit more cautious about investments in marketing companies?Continue reading
Missing the boat
A quick update on Andor Technology, a stock I liked but didn't buy when I looked at it last month. They're a very niche producer of extremely high-specification cameras used mostly in science and research, and have an interesting history going back a few years - a bit more on that in a minute. My regret at not buying Andor is fairly obvious given the events of the last few days; Oxford Instruments, the listed Oxford Uni spin-out (plenty of parallels with Andor here) announced a 500p offer for the company. The share price jumped on the news - from about 400p to closing today at 495p.
There's two interesting sides to this story, so I'll briefly cover both.
Oxford Instruments' Insistence
Share price movement when a bid is announced is always interesting, because it becomes an arbitrage game. How long will the deal take to close? Will the deal close at all? Will the price be improved or worsened by the bidder? All of these factors have to be priced into the stock almost immediately. It becomes a game of weighing all the competing factors and coming up with a price which fairly discounts them all. Here's what's interesting about Andor, then - the price has shot up to 495p against a takeover bid of 500p, and there's still resistance by the board - so the deal doesn't seem likely to close soon. Why would anyone hold a stock for a potential 1% gain (sans all trading costs - which will push it negative) at some point in the future, when the deal is resolved?
You have to infer that the markets are pricing something else into the equation. The blunt answer is the expectation that Oxford Instruments will, once again, raise their offer. Their previous form in this is a big indicator; here's the pertinent paragraph from the offer statement:Continue reading
When the going gets tough
A few weeks ago Red posted a tweet that elicited a bit of a chuckle and a dose of introspection:
As someone who started investing in early '11, I feel like the missed the first half of the good times, but I reckon I'm rather lucky to pick it up when I did. Blogs come and go all the time, and I often wonder what the propensity is for continuing a blog if (as I did) the author is hoping to do reasonably well investing, and finds himself either flailing horribly or tracking the market. There's probably a nice dose of selection bias in the bloggers you're reading now having track records of outperformance - if 100 blogs start and their results are determined by coin tosses, if the ones who did badly get bored and leave, you're left only seeing the positives.
The problem I'm still wrestling with is that much of my performance was determined by those share picks I made right at the start of the blog - at a time when I professed to not knowing much at all. I knew that at the time, and I know it more now - all I can realistically claim to have done right back then were the very basics; low P/E, low P/B stocks and smaller stocks by market capitalisation tend to outperform in the long run. Much of the qualitative stuff stems mostly from experience; experience you don't necessarily have to get from investing, but which allows you to ask much more incisive questions and cut to the really important news more quickly. That's experience I definitely did not have.Continue reading