Ticking the big three
That somewhat cryptic subtitle comes from a renewed focus on simple, logical principles; the big three for any investor, and the three statements in an annual report. They are, of course, accounting earnings, cash flow and assets. I put together a screener on Sharelockholmes focusing on those and found myself mildly surprised, mostly because it had a lot of companies I had looked at, and a few I owned. Reassuring, at least, that my portfolio still matches my evolving standards! Breaking down the parts, anyway, I wanted companies on a low price to tangible book (beneath 2) whose cash flows were reasonably similar to their accounting earnings over the last 5 years and whose prices didn't exceed a multiple of 10x their last year's earnings, or 14x their last 5 years. I reckon that broadly covers the bases of 'not too expensive' and 'not too dodgy'.
One of the shares that met all those criteria was Nationwide Accident Repair Services. Their business model makes them mostly business-facing; they interact with the insurance companies who pay them for the privelege of repairing covered cars, though as part of their 'three year growth plan' Chairman Michael Marx sets out a renewed attempt to target both fleet operators and the retail market where they are 'relatively under represented'. The announcement plunging them firmly into potential value territory came last November, when Nationwide issued a profit warning due both to the economic climate and unseasonably mild weather. Since both of these can be expected to be mean reverting, a 33% drop in the share price catches my eye as a potential over-reaction.
The graph confirms the screener's criteria of consistency, and the metrics below certainly make it look cheap - though I'd take both the dividend yield and forward P/E with a big dose of caution. The forecast for next year's earnings look very optimistic given what management have already said, and dividends always look shaky on a background of declining earnings. The strong book is mostly comprised of trade and other receivables, which should be reasonably safe given the customer makeup - mostly insurance companies. Debt is nonexistent, though the company does have a not-insignificant amount of obligatory lease payments to make over the next 5 years and beyond, totalling £51.8m. The company also has my pet hate - pension obligations - sitting on balance sheet, though they're in the asset section at the moment. (more…)