Monthly Archives: January 2012

Nationwide Accident Repair Services (NARS)

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.

Friday Reading

Birds of a feather

While there’s a degree of overlap in the value investing blogosphere, there’s also a degree of distinction, too. That comes from value being so difficult to define; are cigar butts value? Are net-nets where management is splashing money on ‘operational improvements’ value? Does cashflow or earnings define value – indeed, how do you weight all the different factors in deciding when to invest? Entertainingly, there’s also the itchingly contrarian instinct that runs through this value blogger – and while I can’t speak for all of them, the emergence of Dart Group on more than a few of our portfolios has set off a flurry of conversation on Twitter!:

A downside of blogging is you realise you’re not as original as you thought! Sometimes I worry abt value investors herding…

 

@RichardBeddard is there anyone that doesn’t own it at this stage?

Richard Beddard and John McElligott respectively. Dart is, by a considerable margin, now the most blogged about stock I own; with both Duncan at Kelpie Capital and the aforementioned John McElligott at Valuestockinquisition posting fairly bullish reviews. Both are well worth reading and go into more operational detail than my piece – and both, I also note, pay particular attention to the interesting cash and cash flow situation of the company. They have piles of cash in payments for services not yet rendered and also have the usual business with a large depreciation charge bringing down accounting earnings, but potentially shifting ar0und investment to manipulate cash flow. It’s an interesting company, anyway, and it’s down ~30% since I purchased; and I did think it was rather cheap then.

Marston’s (MARS)

Stronger and cheaper

Stronger and cheaper than what, I hear you ask? Well, Marston’s were the second company I properly analysed – though I never did a writeup on them – and Philip O’Sullivan jogged my memory recently by suggesting I take another look at them. Firing back up my spreadsheets (which are, unsurprisingly, far neater than they are nowadays!) I saw only positive comparisons; they’ve been dragged down by the general market fall, over 10% since my first look, and they managed to meet the market expectations I had my doubts about in the first place. As you see from the graph and table, then, metrics look good. 2009 was a significant (but understandable) dip, apart from which they’ve earned good profits. The 5 year average sits at £58.5m, or a 5YP/E of under 10.

Those of us in Britain will probably know what Marston’s do, but their business is split into three divisions – Inns and Taverns, Pubs, and Beer. The distinction between the first two is the managed vs. tenanted debate – Inns and Taverns are managed by Marston’s themselves, whereas the Pubs division comprises those leased out. The pie chart below shows the split between these divisions. On gut feeling I quite like the business model as it is, as they proudly declare, vertically integrated. It benefits from its scale and expertise, and enjoys strong margins because of it.

A cursory glance at the chart and the gap between operating profit and net profit points to the obvious downside of the business, though – large interest payments implying a big debt burden. That’s exactly the case, but I’ve become somewhat accustomed to it with my soiree into retail – after all, riddle me this: is there really such a fundamental difference between a retail company with long-term lease commitments (no property on balance sheet, no debt on balance sheet) or Marston’s, who own their property and finance it with long-term loans (property on balance sheet, debt on balance sheet)? Both companies have similar cash outflows; rent or interest. Both companies, essentially, have absorbed the risk of being beholden to someone else – for that’s exactly what onerous long-term commitments do; transfer cash flow risk to the leasee. From a debt and cashflow position, then, they look almost identical. The only difference as far as I see is who takes risks on the long-term value of the underlying property.

RSM Tenon

Downward Momentum

It’s with a sense of both anticipation and inevitability that I come to writing my first ‘failure report’ – casting my eyes back at what made me make the decision to buy a share that would go on to perform so badly, and what in future I should do to prevent it from happening again. RSM Tenon has been floundering for months, but today saw a statement that blindsided me in two ways; firstly, the company said it expected to report an operating loss in the first half, and secondly with the resignation of both the chairman and CEO. They weren’t particularly popular figures in the investor community, but it hardly speaks well of the business that they choose to suddenly leave now, in tandem with such poor operational performance and the ongoing ‘comprehensive review’ of their financial reporting.

This isn’t the first profit warning RSM Tenon had made, I should note – there have been several (roughly correlating with each downward ‘avalanche’!) on the way down, each of which saw me using the argument that the case was fundamentally the same; sure, the bad news was bad, but since it was always accompanied with a steep share price fall, it was being priced in. My argument remained intact, just at a lower price level now. Looking back, though, the mistakes I had made when first analysing the company seem fairly evident.

Lured by the numbers – the strong dividend, good profits and good broker forecasts gave me a sense of confidence in the operating performance of the business. Management outlook was bullish and highlighted several easy ‘cost savings’ and contract wins. The balance sheet was hardly perfect, but didn’t seem too worrying in relation to the price, though cashflow was clearly an issue.

Too much faith in ‘intangibles’ – by intangibles in this sense, I mean I placed too much faith in predictions made by forecasters and management. From the interim statement, for instance – “Benefits of integration remain firmly on track to deliver a contribution of £10m in cost savings alone” – it seemed perfectly logical at the time given their recent acquisition, and it’s rather attractive to talk about searching out those easy savings, (especially in the current political environment!) but it would have been more prudent to be sceptical – if they were so easy, why had it not been done yet?

Friday Reading

Giants and Minnows

Having jotted down some thoughts on retail this week, probably my overarching sense was one of confusion and difficulty. As I began discussing at the end of my last post, I get the distinct feeling my personal biases (I’m not a great fan of high-street shopping, except in specific cases) are rather clouding my investing judgement. Lo and behold, Saj at Barel Karsan posts about what looks like a similar business to Dixons – hhgregg, another electricals retailer:

“Bricks and mortar retailers like Best Buy and hhgregg are having to compete with web retailers like Amazon who appear to care a whole lot about market share, and not a whole lot about margins. This dynamic has hurt the profits of everyone this year, as the battle for market share is on. But there are a few reasons to believe the threat is a little bit overblown in the long term… there is a large customer segment that prefers to shop in stores”

Possibly true, though it’s not something I’m very familiar with. Maybe when I need to buy more white goods I’ll appreciate the pleasures of opening and closing unplugged fridges and freezers. The above – the feeling that there probably is some value there, hidden behind my dislikes, was rather succinctly summed up by Nick Kirrage at The Value Perspective. While the example is different, I think the reasoning is applicable – people have an overwhelming tendency to overstate how fast things will change; that ‘this time it’s different’ mentality. It’s an easy and ubiquitous cognitive bias, and I think that makes it somewhere a savvy investor can beat the market. Still, it’s right to be picky. There’s no shortage of cheap retail stocks at the moment; if you think the high street will survive and not die the horrible death many seem to predict, there’ll certainly be cheap ways to play it.

International Retail

Comparisons

Last post I outlined three stocks I thought were interesting to look at because of the UK question – the problems in valuing a group as a whole when different parts within that group are performing so differently.  This post I’ll try and highlight a few different metrics and ways of looking at things to try and draw distinctions between the companies. This is, of course, all complicated by the fact that the three – Dixons, Tesco and Mothercare – sell quite different things, but then that’s half the fun in investing!

Group level

On whole-group levels we see the valuations aren’t too different on earnings terms for the three companies. All are on depressed last-year multiples (note the scale) and both Dixons and Tesco have forward earnings estimates which put them on a P/E of less than 10. Mothercare, I should note, is forecast to post a tiny profit next year and significant improvement thereafter. On tangible book terms, Dixons is the only one posting negative equity – largely because its recorded equity comprises mostly of goodwill instead of hard assets. Dixons do have considerably less to pay in obligated lease payments however, and their classification puts them on balance sheet, unlike Mothercare’s and Tesco’s considerable bills.  The type of stock also sees Dixons carrying a large amount of inventory (£960m) and therefore payables (£1.6bn) in group, which is something that one should always consider if forecasting a slowdown in the future.