Becoming a Cropper
Posted on July 20, 2009 by Richard Beddard
Filed Under Companies |
In practice:
Moors and mills, and long-distance love
The share price of James Cropper (CRPR), a Lake District paper manufacturer, is in long-term decline, interrupted by brief spouts of enthusiasm. It’s a heady mixture, a declining share price in a relic of our great industrial past.
The company has not been a good long-term investment in recent times, which could be good, if contrarian news, if it means that shareholders are fed up but Cropper has a profitable future. The important thing is not to get carried away with romantic stories of moors and mills, and long-distance love.
The most recent bout of stockmarket enthusiasm in 2007 may have had less to do with paper, though, and much to do with a surge in profits in Technical Fibre Products. Cropper formed TFP in 1985 to manufacture mats and veils of carbon, aramid (high strength flame-resistant fibres), ceramic and glass, which end up in products as diverse as consumer goods, fire doors, and fuel cells.
While the subsequent flattening of profits at TFP and collapse in profits from high quality colour paper making and retailing, the share price has sunk to new lows. Fluctuations in the price of energy, wood pulp and currencies mean Cropper’s costs, and therefore profits, are variable.
But the year’s results weren’t as bad as the fall in overall profits might suggest, despite one of the “most extraordinary years” in its speciality paper businesses’ history. Extraordinarily bad, that is, with high raw material and energy costs followed by recession. Still, the company reported increased cash profit (as opposed to accounting profit), a higher ratio of current assets to current liabilities, and less borrowing.
Borrowing only came down marginally though, and interest payments gobbled up nearly half of operating profits. There’s also a bigger liability lurking on the balance sheet.
Cropper still runs two defined benefit pension schemes, which, inevitably in a company this old, are big. The total obligation in March was £57m, £9m more than the pension assets were worth in March. That liability, which is as much as Cropper’s stockmarket valuation, must at some point be recovered, either at the expense of shareholders through the company’s profits or from improving stockmarkets, maybe both, but I wouldn’t bank on the latter doing all the work.
Separated at birth? James and James Cropper
Chairman James Cropper, great, great grandson of the original James Cropper, and deputy chairman Mark Cropper, author of the company’s history and six generations removed, bought nearly £250,000 worth of shares when they hit a low in March 2009.
It may demonstrate their confidence in the future, but more ownership is a double-edged sword. The directors directly own about 23% of the shares, and are therefore well incentivised, but they control about 60% of the votes if you include non-beneficial interests.
The lists of substantial interests and directors shareholdings on page 25 of the 2009 annual report are complicated, and more difficult to interpret than usual (I’m seeking clarification from the company) but it looks like the directors and/or the Cropper family control more than 50% of the votes, so they control the company.
Control protects the board from outside shareholder pressure. It’s probably helped keep the company independent, because major shareholders could vote down a bid. It makes it easier to persist with generous perks, like the final salary pension scheme (it’s closed to new members though, and has made the terms less favourable for existing members), and should the major shareholders have sufficient control it would make it easier for them to take the company private (though it’s been listed for nearly 60 years).
These things may or may not be in the interests of outside shareholders, but the point is they have little say.
Control is a problematic issue for me because I don’t trust outside shareholders either, especially when they are City institutions! Often their interest in performance drives companies to make deals or drive short-term profits, when actually a longer-term strategy would better reward patient investors. Small investors don’t necessarily have an ally in their larger brethren.
There’s probably a happy medium, where owners, directors and founders have “plenty of skin in the game”, as Anthony Bolton says, but substantially less than 50% of the shares.
Years ago I was more sanguine, but a spate of delisting has effectively forced small shareholders out of promising recovery situations when prices are low. I wrote about my own experience with Northern Recruitment, and Kevin Goldstein-Jackson bemoaned the trend in the FT on Friday.
When I started writing this profile I thought Cropper might be a classic cigar-butt share, one with a few puffs left in it, but because of its record of diversification and stubborn survival, it’s more interesting than that.
Nevertheless, the shares are on a ten-year price earnings ratio of ten, and therefore only hovering on the edge of bargain territory. Although the last ten years could be representative of the company’s future earning power, I think there is more than the usual level of risk in its pension obligations and its ownership.
Maybe its not yet time to become a Cropper shareholder.
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No news is good news from old favourites printing.com, Business Post and Delta but T Clarke warns profits will be lower.
In theory:
Love those short-sellers
Paul Krugman is researching the link between the deficient market hypothesis and the financial crisis. He says it made people complacent. Who? Eugene Fama, one of the inventors of EMH, judging by this interview.
Bull elephant seals are in a genetic arms race with each other. The bigger they get the more successfully they attract mates, and predators. Similarly, the more money wealth managers make in the short-term, the more they get paid, and the more they put the financial system at risk says Robert H. Frank.
Here we go again, says Martin Wolf, recovery, albeit fraught with risk, is underway and we haven’t learned a thing.
An interest rate rise above 2% is inconceivable until well into 2011, says Anatole Kaletsky. Yes, but what then Anatole? If we’re mortgaging now, shouldn’t we look further than two years ahead?
The FT ponders whether silicon chip manufacturers will go the way of vacuum tube manufacturers.
You wouldn’t want to be in autos, employment or furniture, judging by this chart of jobs lost and gained during the recession. Health, oil and gas, and government, maybe.
Joel Greenblatt looks for certainty in a company’s ‘normal’ earning power.
Beware companies with only a few customers, says Barel Karsan.
Graeme says there’s no such thing as an internet company.
Anthony Bolton: Short sellers could teach regulators a thing or two.
Comments
7 Responses to “Becoming a Cropper”
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Hi Richard,
Nice article, as usual.
I was thinking recently about inflation. A lot of commentators say that high unemployment and idle capacity means that deflation will exist for a long time to come. However I do wonder if such an environment might not actually an ideal breeding ground for inflation.
It appears that companies have managed to downsize enough to predict their earnings. People are getting more confident about keeping their jobs. House prices seem to be stabilising (even though they are probably still too high on average, relative to earnings). The competition is much less in certain industries. There is a wall of new government money starting to hit the system right now. The people who are currently employed will probably continue to be employed at their current salary levels. The unemployment rate is bottoming out in a predictable fashion. Governments will need to start taxing more as a result of their lemming-like actions.
If companies want to start to increase profits in order to grow again, then raising prices seems like an easy way to do this in the current environment.
Perhaps we should be more worried about inflation.
Well, as you know I’m not much of a seer! In a way I hope you are right as deflation is very bad for investors. Value investors buying asset rich companies at a discount could see the value eaten away by falling prices (unless of course its cash). That and the fact that its hard for businesses to make money when prices are falling!
The trouble is there are two different views out there. One says all the stimulus money will cause inflation. The other says there’s not enough stimulus money to make up for the new era of corporate and personal frugality and until that gap is filled there’s no chance of inflation taking off.
Both sides seem to have credible arguments (It really comes down to whose huge numbers you believe, and huge numbers are very difficult to make judgements about!) so like you sometimes I worry about inflation, but sometimes I worry about deflation! I had a go at making sense of the econimic arguments here: http://blog.iii.co.uk/how-many-economists-does-it-take-to-start-a-flamewar/
Richard.
Well the stimulus certainly caused inflation in the banker’s salaries
Whether you would expect earnings and jobs to start to bottom out after 2 years of recession, regardless of a stimulus, will be an argument that will rage for years no doubt.
Also, how much of the Fed’s money has actually reached the real economy versus taken out in bankers fees will be interesting to look at in the future.
I read an interesting and somwhat befuddling article in the FT yesterday, saying that quantitative easing may not be working.
The argument was that printing money is necessary because we are so indebted that no matter how low interest rates fall, individuals and corporations will pay down debt.
But if option 1. (interest rates) is not working and option 2. (printing money) is not working, the fear is a Japan style deflation.
Rather than attempt to summarise the technicalities, I’ll do myself a favour and just link to it
http://www.ft.com/cms/s/0/76c47b48-7619-11de-9e59-00144feabdc0,s01=1.html
One day I might get some kind of advantage from trying to understand markets and economies from a top-down perspective, and I keep plugging away at it in that hope, but whole economic systems are so complex I feel my efforts are more likely to be rewarded focusining on problems I can more fully comprehend, like whether individual company shares are good value
I actually think QE scores a 5/7 for effectiveness in propping up the stock market (sorry I meant the economy). My scores are below:
1) Recapitalise the banks through the back door at everyone’s else’s expense – yes
2) Keep politicians in power a bit longer – yes
3) Astronomically increase our debt burden so that we will be paying 10p for every pound we earn just to pay off the interest at 0.5% - yes
4) Push the repayment of our debt burden to the next generation – yes
5) Keep liquidity flowing to highly indebted private equity buyouts so that they can remain profitable – yes
In fact QE has only really failed on a couple of measures
6) Keep liquidity flowing to small and medium size businesses so that they do not go bankrupt – No
7) Keep interest rates low – No
So, all in all, a fairly good show for QE.
Do I detect a trace of sarcasm?
I was listening to a story today about how the banks are making more profit than they ever have on the spread between the base rate and the mortgage rate, and it made me think of a suitable word for banks (there are many others of course
)
Cartel