Fag end investing
Posted on April 8, 2009 by Richard Beddard
Filed Under Companies, Investing, Markets |
In practice:
Molins and Porvair, wheezing and puffing
Whichever way you look at it, Molins’ (MLIN) price earnings ratio is very low. The shares cost just one times last year’s earnings, or nearly 1.5 times the average of its last ten years of earnings. The share price is just one fifth of its book value, the accounting value of its assets minus its liabilities, and it’s almost a fabled Benjamin Graham net-net.
The value the stockmarket puts on Molins is only 73% of its net working capital, its current assets (stock, debtors and cash) minus everything it owes. Such bargains rarely appear, except in extreme bear markets.
Molins could be a classic cigar butt share, a depressed share that’s worth picking up for one last puff, which is ironic, because it makes the machinery that makes the cigarettes, as well as machinery that makes packaging.
But, it’s financially quite weak, scoring four out of nine on Piotroski’s F_Score and despite an accounting profit for shareholders in the year to December 2008, more if you included exceptional items, it made a cash loss on its operations. The packaging businesses are suffering most, but though you might think the tobacco side ought to be resilient in a recession, the company says in its annual report that it’s pessimistic and uncertain about 2009 because cigarette manufacturers are rationalising and relocating their factories.
I’d find investing, even partially, in the cigarette industry difficult, anyway, so I’m not exactly willing this one to turn around. But I will keep watching Molins as there’s no tobacco bar in the model Thrifty 30 portfolio I’m putting together, and it sure is cheap.
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Porvair (PRV) looked like a good company at a bargain price, but yesterday’s AGM statement, showed that things can always get worse, before they get better. It reported a 20% fall in US sales in recent months. Its response; a 40% cut in US staff, temporary salary reductions for the rest, and negotiations with Barclays to revise its banking arrangements, only agreed last July.
On 30 November, Porvair had about £19m debt, about £1m repayable in two years, and the rest maturing in 2011. Total assets were £74m, over half it goodwill, and £2.5m of it cash.
Although the price fell over 20% yesterday and the company thinks business is picking up, if Porvair’s a bargain, it’s a speculative one at the moment. It won’t really fit the ‘safety first’ remit of a Thrifty 30 portfolio until there’s more evidence that sales and margins have stabilised and it’s made a new agreement with Barclays.
In Theory:
Another false dawn
In the US, the market has rallied 25% in a month. David Rosenberg, ‘recession psychic’, says most previous recoveries approaching this scale have been false dawns.
Alphaville goes ambulance chasing and discovers we are nowhere near the number of bankruptcies you might expect, at the bottom of the market.
Dave Ranson of Wainwright Economics says shares are cheap relative to gold. Although shares are below the long-term trend, it could be a long time before they recover.
The FT reports massive pensions scheme liabilities, two or more times the market capitalisations of companies like DMGT, Trinity Mirror and ITV, hinder consolidation
The 2007 edition of Burton Malkiel’s classic book, A Random Walk Down Wall Street, includes a chapter on behavioural finance, a theory that challenges the random walk he writes about.
My favourite part of Investing with Anthony Bolton was the chapter by Anthony Bolton, so I have high expectations of his new book: Investing against the tide: Lessons of a life running money. The IC has an interview.
Wide Moat Investing is serialising Warren Buffett’s letters to shareholders, starting with 1977. He’s up to 1978.
A reminder of how wrong we can be, and some suggestions of how wrong we might be.
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