To understand any business, you need to understand a little about the history. Northern Bear was, as was often the case in the good old days, cobbled together with flowing money and attractive public markets. Several construction-related groups joined forces to create a platform company, with the intention of buying further complementary businesses and scaling up the combined group. Isoler, Roof Truss, Springs Roofing and Wensley Roofing all joined forces to create Northern Bear, which floated in late 2006. Whether they would have made a success of their acquisition strategy is difficult to say, because they got a pretty short pop at it before the recession crashed the party. Debt-financed purchases were out. Anything construction related was definitely out. In some senses they weren't so dissimilar from Judges in that they planned to provide exits for small, owner-operated building services firms at attractive multiples for the group. A key difference is that they were rolling up a market which saw swingeing cuts in spending in 2008-2009, and thus necessitated a complete change of strategy. (more…)
Disclosure: I have an interest in Quarto shares
Forgive me for the Churchill reference – but it does have some relevance for my illustrated book publishing friends at Quarto. That’s because, along with their 17th March final results announcement, Quarto noted that the two activists still on their board – after almost four years of involvement – will be standing down at the next AGM. The group has successfully passed through a phase of reassessment and considerable uncertainty, as the long-time CEO and founder of the company stepped aside on the activists’ behest and made way for a new leadership team.
Quarto has reduced debt, sold off non-core assets, started several innovative new imprints and improved financial results. It was, I imagine, something of a tight-rope walk.
The group still trades at less than 7.5x my run-rate cash flow estimate. I think they can generate around 13% of their market cap in freely available cash each year, with which management can choose to either pay down debt, distribute a dividend, or invest in acquisitions.
My opinion here has not changed – this is too high a free cash flow yield for a high quality company. The market gives it little credit for the resilience of its business model and places undue emphasis on financial risks from a relatively high (though now substantially improved) debt position.
Despite continued strong momentum in the shares over the last few years, the rating remains little changed – the improvement in price has mirrored underlying improvement in the company. There is further to go, and the slight loosening of the one-track strategy of debt reduction heralds, for me, the next chapter of the investment. (more…)
Disclosure: I have an interest in Judges Scientific shares
I last wrote about Judges Scientific about 6 months ago, in May. There, I laid out the case for why I think it is one of the best companies on AIM, and why I thought the price was undervaluing both the business as it stands and, more importantly, the potential for the management team to continue enriching shareholders through their well-worn acquisitive strategy.
The day before that post, the price of Judges shares was £17.40. Today, the price stands at £15. In this post I will walk through what has happened in the interim, along with an updated valuation. The short summary is that the group has reported good news on order book, the best leading indicator of sales we have, and has proven that the latest acquisition they have completed was still as accretive as in previous years. It is thus both cheaper and more valuable.
A quick recap of the elevator pitch: the company buys small, niche scientific instruments businesses as they come to the end of their private lives. They then let these companies run with a great deal of autonomy, with the central hub's main purpose being capital allocator for future deals. This is interesting for three reasons:
- The UK has a large number of small scientific instruments companies due to the existence of world-class education institutions. Smart people find a niche that needs to be satisfied, and start a business to satisfy it.
- Said businesses have superb characteristics - exceptionally high margins (Judges runs at 20%+ on a consolidated level), low incremental capital employed - and hence excellent cash flow profiles, and tailwinds from increasing global research and education spending (China is a big boost to this). They typically export the majority of their revenues and have limited meaningful competition.
- Judges is small enough to buy the small ones and still have them move the needle. They can hence provide a home for excellent businesses while still being picky about price.
I'll start this post with a quote from Howard Marks, who himself is quoting Charlie Munger. I never said I was original:
In 2011, as I was putting the finishing touches on my book The Most Important Thing, I was fortunate to have one of my occasional lunches with Charlie Munger. As it ended and I got up to go, he said something about investing that I keep going back to: "It's not supposed to be easy. Anyone who finds it easy is stupid." As usual, Charlie packed a great deal of wisdom into just a few words...
... what Charlie meant is this: Everyone wants to make money, and especially to find the sure thing or "silver bullet" that will allow them to do it without commensurate risk.
The talk of the town is the Globo situation. I have nothing to add on that front, so I won't presume to try.
One thing I do like to watch, though, is investor behaviour in the wake of events. Many chalk losses up to bad luck, or attribute the blame to some external factor beyond their or the company's control. Sometimes this is reasonable; often it is not. Others look to their process - how they are selecting securities - and then try to figure out what can be fixed to make sure they do not fall victim to the same mistake again.
This is a noble endeavour - a bit like the race driver who figures out, through repetition, that he needs to swing a little bit wider on the second corner to avoid clipping the dirt. There's an appealing sense of progression in self improvement; a logic that, if you can just fix what you did wrong with every misstep, you'll end up being a consistently profitable investor. (more…)
Disclosure: I have an interest in Quarto shares
Quarto reported results today. For those wanting some background, I'll requote what I first said when I looked at the company:
Quarto are in publishing, but with a few key differences from firms that may immediately spring to mind. The most important one is probably the type of books they are producing. Instead of focusing on fiction, a rather hit & miss affair that hopes to churn out a few bestsellers every year to compensate for some of the flops, Quarto have a varied portfolio of books with very narrow remits and niche audiences. Perhaps I could best illustrate this with their best selling book in 2010: ‘Complete Guide to Wiring’. By focusing on books for such small groups of people and keeping such a wide portfolio, Quarto remain fairly insulated from the more brutal swings in consumer spending.
Over two thirds of the group's sales come from backlist - titles published in prior years. No title accounts for more than 1% of group revenues in any given year; last year, the biggest was around 0.6%, the second around 0.4%, and the tail develops after that. I repeat those facts as a sort of mantra when people ask about Quarto, because when I tell them it's a book publishing company I always get the same blank stare. Investors remember Quercus, which blew up after over-stretching itself after the success of Stieg Larsson. Investors remember Bloomsbury, which saw its revenues double and then drop by 33% in consecutive years thanks to Harry Potter.
I think it's undeniable that Quarto are fundamentally different.
Lots of people think the market is dangerously expensive. They take a look at the S&P 500 graph, which looks like this:
And they'll point out that we're now about 50% higher than we were in 2007, just before the last crash. Has there been a stupendous improvement in the real economy since then? No, they'll argue, and so the index level must have been frothed up. You'll probably hear something about printing money at this point.
But the graph in itself doesn't tell us a great deal, since it's raw data without any comparator. Much better to look at how the companies making up the index are doing, and how they are valued in aggregate relative to a proper measure, like earnings. At this point the Shiller PE graph often gets trotted out. It is basically a 'normalised' price-to-earnings graph, which shows the current multiple you're paying for the average last-10-years earnings for the companies making up the index. (more…)