My post on Begbies Traynor last time raised a few interesting questions from a portfolio management point of view. As I was writing it, I couldn't help but draw comparisons to RSM Tenon, the rather despised accountancy firm - both service firms trading on tiny multiples of last years profits after an acquisitive period and some extensive intangibles. Both have balance sheets tied up in illuiqid receivables, and both sets of management seem bearish even in the face of such market hammerings. Many things aren't the same, of course - there are some rather big factors that separate the two companies. Regardless, the questions a comparison between the two companies raised left a few lingering doubts in my mind about my current method of comparatively valuing companies.
As readers of the blog will know, I rarely use any form of discounted cash flow analysis or any more 'concrete' method for assigning companies a present value. My long-standing reasoning is that they simply represent the biases we possess anyway - me being bullish on all the companies I am, for instance, will mean that I'll obviously just come out with figures that'll make them look like sound investments. Does assigning a number to my biases really help in any way if it does not fundamentally change my thought process? Instead of filling in a spreadsheet to which I know the answer anyway, I figured, I'd rather just move on and do more productive work.
With that, though, I raise a completely different set of problems. As I thought about the differences between Tenon and Begbies, I struggled with a way to attribute a value to the different problems they face. RSM Tenon faces a management that doesn't seem to particularly care about shareholders. Begbies Traynor faces an uncertain market and may well have just enjoyed their best two years, with corporate insolvencies running way above a long-term average. Qualitatively, I feel I've determined the issues underlying the share price; it's the quantitative bit that needs a little work. (more…)