Huveaux, heaving itself back from the precipice
Posted on May 14, 2009 by Richard Beddard
Filed Under Companies, Markets |
In practice:
How good is good?
Most studies I’ve seen demonstrate that the best returns come from the cheapest companies, and those with the strongest finances. Putting the two together, buying good companies at cheap prices, is common sense.
In practice it can be difficult to do because there is a trade-off between price and quality. It’s not exact, which is why portfolios of cheap shares, those selling on low multiples of earnings or book value, generally do better than portfolios of expensive shares, those on high earnings multiples.
Nevertheless, looking at individual shares, the trade off is acute enough to give a stockpicker a headache, because of the risk that a financially weak company, or a struggling business, will go bust, or remain troubled for years, and not fulfil the potential of its low price.
For this reason I agonised over OPD last week, and again earlier today, when I was looking at Huveaux (HVX ).
Huveaux fulfills the basic criteria of my safety-first approach, the shares are cheap, the seven-year price earnings ratio is just under five, and therefore unlikely to be inflated by investors’ febrile expectations, and the company owns more than twice what it owes.
The difficulty with this measure is that while the liabilities are real, bank loans, overdrafts, money owed to suppliers and so on, the company’s assets are of questionable value.
They are, in the main, goodwill built up since 2001 as the Huveaux assembled itself into a publishing, training and events company from scratch, the publishing rights acquired with those companies, and capitalised costs incurred in the development of software and new titles.
These assets are worth something, of course. I’m sure I’m not the only one to have passed my English Literature ‘O’ level without reading the texts, thanks to Letts, Huveaux’s revision guides. But the question is, how much?
The fact that last year Huveaux took a £7.5m loss when it sold its French healthcare division demonstrates that sometimes a company’s assets aren’t worth what it thinks they are.
I’m waiting for some clarification from the company’s financial director, but in the meantime the sale of the healthcare division is one of the reasons I think Huveaux might be closer to a turnaround than OPD, which I’m still watching.
At OPD, I think management is in denial about the company’s profligacy, whereas Huveaux may be facing up to its past. It’s now focused on education and politics, it owns a bewildering number of publications and runs almost as many events for politicians and civil servants. In its recently published annual report it says:
Huveaux is now a fundamentally different company than it was going in to 2008. While it was established with a “buy and build” strategy, its development is now focused on organic growth.
If that’s true, we might be able to forgive them and invest in the company. Particularly as there’s a new line-up.
Chairman and founder John de Blocq van Kuffeler, described as “instrumental in creating the Group and in all the subsequent acquisitions…” has gone, replaced by Kevin Hand, a non-executive director since 2006. Also Rupert Levy joined as finance director in April last year.
Huveaux’s middling F_Score, a measure of financial strength that can help identify when companies are turning around, doesn’t really give a strong signal, either way.
The last time the Investors Chronicle covered Huveaux (in March 2008) it concluded:
Should you back a business that has come apart at the seams? Until there’s evidence of a recovery, the shares are fairly priced.
Which was sensible advice as the shares have halved since then. But perhaps now it seems to have forgotten Huveaux, along with most City analysts, we’re witnessing the early signs of recovery.
In theory:
Dash for trash over
Analysts confidently predict a ‘V’ shaped recovery, except those that predict a square root shape.
Ashville may have spotted the moment the ‘dash to trash‘ ended. Yesterday afternoon the trash was comprehensively trashed.
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