From ink to online
Grafenia is a company which caught me a little by surprise. It's not often I see companies I have never seen before in any capacity pop up on my screeners (a problem with screeners, you might rightly suggest), but I certainly hadn't heard of Grafenia, and the metrics were interesting. They're predominantly a printing services group who are diversifying - and focusing more and more resources and attention - into 'software as a service' solutions for other printers and related businesses. This is something they have a bit of expertise with, since they've run a franchised network for a number of years. Digging into their annual reports quite quickly explained my perplexity - Grafenia, for all their snazzy new name and business segments, used to be known as Printing.com. And Printing.com is a company I had heard of!
What's in a name, then, and what's happening at Grafenia?
Out with the old..
The old Printing.com was basically a part-run, part-franchised printing group. Working mainly with small companies, they do the sort of stuff you'd expect any business printer to do - flyers, business cards, posters and so on; all the usual jazz. In 2010 they bought a Dutch company in a similar vein; in this case, the company owned three websites and then subcontracted printing. Essentially, in one way or another, Printing.com was involved in most stages of print management; they did some printing, they did some selling and they franchised out the selling. Simple enough - when you're running a capital intensive business like a printer, you really want to be maximising your capacity utilisation and working your assets as hard as possible, since that represents the easiest way of keeping returns competitive. Having lots of channels strikes me as the easiest way of doing this.Continue reading
Why I don't buy goodwill
On Friday I'll be posting on the printing group, Grafenia - who've recently changed their name from 'Printing.com'. You may have heard of them, as they've been around a few of the small cap blogs, but they caught my eye last week. Today, though, I'm easing back into things after a brief hiatus with a talk about a slightly more abstract topic - goodwill, and the accounting interpretation of it. I realise when I write some of my blog posts that I tend to say some things ad infinitum - like my refrain on capitalising operating leases or why I think returns are important. Often, I don't spend much time explaining these things. In this post, then, I'll put a brief explanation behind my thoughts on goodwill - which I nearly always exclude from any calculation involving any of the company's figures. It's pratically an non-entity for me.
What is goodwill?
Goodwill is essentially an accounting creation to make sure the books balance. When a company acquires another, they'll often pay more than the actual assets inside that business are worth; to be horribly trite, think of Facebook's acquisition of WhatsApp, the messaging service. They acquired it for about £10bn; clearly, the assets inside WhatsApp - produced by a team of something like 30 people - are not worth (on book) £10bn. Heck, if we were to draw a line from £0 to £10bn and place a dot where WhatsApp's actual assets sit, I reckon it'd be fairly indistinguishable from zero.
It has its purpose, though. Old accounting rules saw goodwill getting immediately written off in profit or against reserves, which seems in some way to equally fail to capture the essence of what's happened. Companies acquire for a variety of reasons, and acquiring because it makes good strategic sense - buying one of your key suppliers and thus being able to strip out a number of costs, for instance - can be a great boon. There is obviously something value-creating going on in this case, and slapping the accounts with a big charge doesn't feel right or accurate.Continue reading
Between the lines
I've sold out of my entire holding of Tricorn today, as a poor trading update pushed the price down about 35%, closing the day on 20-ish pence. I got out slightly better - at 23p (the bid at my time of selling this morning) - but the transaction still represents one of the portfolio's relatively few losses (about 10% on my buy price of 25p, pre costs). Looking back slightly wistfully on my last report on Tricorn, in December, I note that I thought about - but did not take - the opportunity to sell the shares at 42p a few months prior. Still, it's easy to look back and beat yourself up as information reveals itself - we are always more informed than we were yesterday, and it's what you do with the information you have available to you at the time. So what of the update?
I jumped out of Tricorn fairly quickly. Both the content of the trading update and the way it's presented concern me. I'll quote snippets here, and you can find the note in its entirety here.
Having seen further softening of demand since the Company's announcement of its interim results which were released on 3 December 2013, the Board's current view is that second half revenue, for ongoing businesses, will be approximately 15% lower than for the first half of the current financial year.
I raised my eyebrow on this paragraph; a 15% drop is material and worrying. The group has been ramping up capacity and purchasing/setting up new businesses - so incurring higher fixed costs and charges - and needs increasing revenue to contribute to these overheads. The scale of the fall is such that, if they perform at that 15% drop, revenues will still sit lower than the first half of last year. Looking at their operating costs, it then looks likely that they'll make a pre-exceptional operating loss this year, with possible further exceptional charges on top of that.Continue reading
The burden of pain
I try not to spend too much time talking about economics on the blog; I'm often reminded of the description of philosophy being a pursuit for people with 'too much time and not enough to do with it'. The field of making predictions in economics strikes me as much of the same sometimes; in fact, I often wonder if philosophy derives more worth from its contemplative and numinous aspects. On occasion, though, I strike upon a thought which tempts me to indulge - to cast aside my better judgement and put finger to keyboard on something which does pique my curiosity about the future. Since this is an investing blog, it is - naturally - related to investment. I'll throw my musings out there, some potential equity 'plays' and my esteemed readers can judge the validity of the logic for themselves.
Here's my basic principle, then - the Internet is siphoning trade from the high street. Individuals have bought more and more of their everyday goods from the internet over the last decade, as the efficiency - and therefore cheaper prices - that online operators (like the behemoth itself, Amazon) can bring lures them away from their brick-and-mortar tendencies. I can't remember what the first good to be bought primarily online was; it seems likely to me that it would have been something relatively homogeneous, easy to send/deliver and which requires no physical inspection on part of the buyer. CDs and DVDs seem to fit that bill quite nicely. Now people are buying groceries, celebration cards, phones, white goods... more or less everything is available on Amazon. The limit, simply, is what you feel comfortable purchasing online. Some people, understandably, want to see and touch a product before buying. Some of these people then go and shop online (a lamentable habit, as far as I'm concerned).
Either way, if we accept that the young have a higher propensity to shop online than the old - a fairly undemanding assumption - and that the overall propensity of everyone to shop online is increasing over time, as people become more comfortable with the notion, it paints a pretty bleak picture for the high street. The death of the high street, you hear people lament mournfully, usually while angrily waving their proverbial fist at one of the corporate giants of this world. That's that, then. Where are the investment opportunities here?Continue reading
Communisis are a business engaged in, ostensibly, a very boring activity. You might argue it's become more interesting in the last few years; they went from being a company mostly involved in the printing of cheques and direct mail to a more 21st Century provider of 'communication services'. They talk about integrating with their customers, providing bespoke solutions and about investing in higher quality printing methods - they made a big deal of acquiring an enormous high-tech printer a while back. Fortunately, both for us and them, the picture they paint of themselves isn't an entirely typical rose-tinted management view of the business; it is slowly being borne out in the figures. Margins are on an upward trend, the contracts they are winning seem to be tilted towards the more value-added end of the spectrum, they're closing older (and more standardised) sites and - perhaps most importantly - their higher margin segment is claiming an increasingly large share of group revenues.
'Slowly' is something of a key word here; by virtue of the sort of stuff they do - handle customer communications and printing services - Communisis runs fairly long contract times, and even longer customer relationships. A significant bulk of the work they do, I reckon, is still the bread and butter stuff. That's not a bad thing; customer relationships are valuable, after all, and doing the bread and butter stuff allows you opportunities for cross-selling. That potential seemed to be exemplified this week, when Communisis announced another contract win with Lloyds, a half year after their first - itself a big deal since it represented the 'largest contract of its kind in the UK'. Management are, as usual, a bit light on the details - I suppose for corporate confidentiality reasons - but we have at least a few hints. They're taking on '14 existing sites' in the UK, for instance, and '310 roles will transfer to Communisis under TUPE arrangements'. TUPE - for those who don't want to Google it as I had to - is the maintenance of existing staff contracts when the operator changes hands. I can only broadly guess with these figures - and I emphasise the broadly - but it does allow us to make some comparisons. We might, for instance, note that Communisis as a whole currently employs about 1,500 people - so 300 more represents about 20%. We might suppose the average staff member at one of these sites would earn ~£20k a year, multiply that by the number of employees (giving £6m) and compare that to the total wage expense for Communisis as a whole - about £51m - and consider that a figure of roughly 10%. These are nothing but guesses; but it should be evident that the contract is clearly quite material. Lloyds isn't the only company signing up for their services, either - all of the UK's top ten building societies use Communisis's services, as well as numerous other blue chip clients.Continue reading
In a typically gloomy start to February, I'm beginning the month on a slight diversion from usual programming. Tomorrow evening I'll be taking a look at Communisis - a portfolio constituent which reported more good news this week with a further improvement on the already sizable contract with Lloyds. That deserves a catch-up. For those of you purely on this humble corner of the web for a dose of fundamental analysis and some good old-fashioned collaborative reasoning, that might be more up your street. Today, I'll take advantage of the fantastic soapbox that is the World Wide Web to meander on a topic that's increasingly important to me:
Running a blog on value investing - looking at stocks, researching companies, speaking to management and, perhaps most importantly, talking to investors from all over the globe through comments and email - is a great experience. It's also a fantastic learning tool. When I set up the blog, I considered investing an interesting pursuit and a potential 'hobby' of sorts; one of the more expensive ones, I might note, but with that sense of unlimited potential and the possibility to derive real value out of being able to make 'better' judgements than the market at large. I might hazard a guess that most investors get a sense of satisfaction from that element; it's a sort of intellectually competitive drive as well as a desire to simply make money.Continue reading