Fractal finance and the dull thing about buses

Looking back on my notes on Darwen (DHP), here are some quotes from the 2006 accounts of Optare*¹, the bus company Darwen is buying on July 14 may be buying (*see below), that reveal a slightly more downbeat view of the bus biz. My notes follow them:

The market for new passenger vehicles is relatively static and dominated by a small number of large operators…

Darwen expects demand for hybrid buses, which will be cheaper to fuel and less polluting, to pep up the market along with the need to replace aging fleets. That seems particularly plausible right now as operators report increasing revenues as people switch from cars to public transport. But…

Competition from products entering the market from lower-cost economies in Eastern Europe and elsewhere has grown. To enhance its business performance the Group acquires components from such lower cost economies whilst ensuring its excellent reputation for build quality and vehicle aftercare is maintained.

Darwen’s buying in most of the components bar the bus chassis. Maybe there’s an opportunity to reduce costs once it owns Optare too. It would be difficult for Darwen to make inroads into the market share of Alexander Dennis and Wrightbus, the UK market leaders, if it were unable to manufacture better buses more cheaply.

As I’ve said before (at the end of this interview with ceo Andrew Brian, and in this blog) the ‘plug and play‘ manufacturing story is as important as the technology/environmental story. Perhaps more important. That said, growth companies in no-growth markets are often the ones that go unnoticed.

Part of Darwen’s appeal – despite the hype around climate change and fuel prices – is the fact that it’s in a pretty dull business.

*Darwen’s share price has recently halved to 22p, possibly in the wake of Tanfield’s catastrophic profit warning on Tuesday. The businesses have similarities and in Roy Stanley they share a chairman and major shareholder. I don’t know how this affects the 40p placing that shareholders were to vote on at the Extraordinary General Meeting in two weeks time, but presumably the deal could be in jeopardy.

Spotted: Johnson Service

It’s still going then. I spotted this delivery van for Stalbridge Linen, part of Johnson Service, One of my Ten boring companies in deep trouble. Judging by the share prices they’re all still in pretty deep trouble. But I keep watching, where others maybe wouldn’t.

Ironically it was the botched implementation of Johnson’s IT system, subsequently written-off, that hid problems at Stalbridge and then compounded them by delaying the payment of invoices.

Memories of Mandelbrot

Fellow blogger, and the entrepreneur behind the highly informative Moneyterms site has reviewed The (Mis)behaviour of Markets by Benoit Mandelbrot. I reviewed it in our bookshop (you can buy it there too!) This is book is right up there on my shelf of investment books never to enter the jaws of the Oxfam collection in the car park of our local Waitrose. Mandelbrot is the inventor of fractal mathematics.

I’m particularly interested in Graeme’s view for two reasons:

1. As a former analyst he knows more about the theories that guide the professional investors and bankers who dominate the markets, and…
2. We’ve often sparred on efficient market theory, one of the cornerstones of financial theory, and one that Mandelbrot attacks.

Though Graeme criticises Mandelbrot (and me, if I might be so outrageous as to put our names in the same sentence) for oversimplifying modern finance theory and then criticising it, he concludes:

My impression is that fractal models probably hold the key to much better approaches to risk, to portfolio theory, to options valuation, and to valuation in general. At any rate, I am going to have to learn something about this.

Which is good reason to revisit the book, I think*².

Footnotes:

1. It is a private company, you can buy the reports from Companies House for £1 each.
2. Here’s a bit of ancient history for you: I interviewed Mr Mandelbrot in 2004.