As I was going to (buy) St Ives

I wondered whether it would survive

It’s doubly ironic that St Ives (SIV) chooses to feature a direct mail campaign promoting Google Maps in its annual report.

Admittedly it also devotes pages to a giant carrier bag it made to promote Sainsbury’s Finance, brochures for the Brooklands Bentley car, a peelable front cover for Wallpaper* magazine inviting readers to remove the clothes of the cover model, the latest Dan Brown book, and a trade stand for GlaxoSmithKline.

But Google? A company that makes most of its money selling inkless advertisements, and gives people unfettered access to online books and magazines that St Ives might otherwise print, and music and video that St Ives might otherwise package?

That Google still needs direct mail is positive for a printer, I suppose, but in every other way, the Internet has probably worried St Ives shareholders since the shares peaked in 2000. Analysing St Ives is forcing me to reconsider the companies I’ve reviewed that profit from print.

Some print, some publish, and some distribute. St Ives prints and distributes. Unlike Haynes Publishing, it doesn’t own information, but like say Communisis, it stores and sends mailshots (and books etc.). Unlike, UKMail, it doesn’t actually deliver them.

Of these companies, I’ve only included Haynes in the Thrifty 30 portfolio although judging by the numbers at the time all of them were reasonably cheap, and strong.

Haynes, which publishes motor manuals, has adapted in recent years. It no longer prints its own manuals, and it provides its vehicle blueprints electronically too. While mechanics still need Haynes data I think it still has a business, Haynes just has to work out how to charge for it and how to deliver it.

Printers face a different problem. Digital media is replacing their product, and in their darker days they must wonder if they face extermination.

Many of the markets for printed material, from CD inserts, to magazines, to direct mail, are shrinking. Although potboilers seem to be holding out against the digital onslaught, and advertisers will probably keep sending us mail until the last person opts out, printers are scrapping over a diminishing pool of profitable businesses. To compete, companies must invest in modern equipment and shut down old and unproductive factories. Fluctuating energy and raw material costs add to the uncertainty, and costs.

I don’t think there’s any point in speculating on how much smaller the print industry will be in future, it seems only safe to assume that profits will be substantially lower and so, while a company is normally a bargain if it costs less than ten times average earnings, shares in a printer would have to be cheaper.

Thanks to recession, St Ives shares cost just 2.5 times its average earnings over the last ten years, or about thirteen times 2009’s profit figure, ignoring exceptional costs. But, also thanks to the recession, its F_Score is a borderline five out of nine.

While it doesn’t look like it’s going bust, St Ives is financially challenged.

In 2009, it lost money for the first time since it listed in 1985, if you include exceptional costs from the sale of its US and Dutch subsidiaries and the closure of two factories.  Even ignoring those costs, profitability fell sharply from a 7% return on total assets to 2%.

Some of the decline is reversible. In recessions magazine publishers close titles, order fewer copies, and cut the number of pages in each one. During recoveries they expand the number of titles, their print-runs, and their publications. Likewise, in a recession retailers, which use printed materials to promote products in stores, fail or become more demanding, and when they recover, they grow.

But there are risks. Although St Ives reduced its debt, it still owed £33m at its year end in July. While it reduced its pension deficit, it still owed its pension scheme £38m, a figure that varies as the value of the pension fund and it’s obligation to current and future retirees fluctuates, and as St Ives makes monthly payments at a rate of £2.2m a year.

These liabilities are another drain on the company’s resources, especially if recovery is muted.

Like Wolseley last week. I’m tempted to add St Ives to the Thrifty 30 model portfolio. Investors may have overreacted to the combination of recession and the perception that print is dying. While I can’t conceive print will ever be a go-go sector, there may be a few puffs left in the old cigar-butt.

But I’m not sure I want to smoke it.

My stockpicking checklist has three items at the end of it. That:

1. The company is financially strong,
2. It’s not facing overwhelming competition, and…
3. The shares are cheap and liquid.

While the shares are very cheap, I’m just not confident enough about the business of print.

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Being Warren Buffett

Following Evan Davis’ profile of Warren Buffett, the BBC has published interviews with Buffett, Charlie Munger, Susie (his daughter) and friends.

My thoughts on being Warren Buffett [podcast].

Just published: Value Investing – Tools and Techniques for Intelligent Investment by James Montier. Sneak preview here. He’s writing The Little Book of Behavioural Investing too.

Shorting the dollar and buying virtually any global asset is the mother of all carry trades, says Nouriel Roubini, and when the bubble bursts (have you heard this before) there’s going to be the mother of all crashes.

Martin Wolf reviews Andrew Smithers‘ book, Wall Street Revalued. Value matters in an ‘imperfectly efficient market’, he says, but not so you can profit from it.