Identifying Wagon’s smoking carburettor
Posted on September 10, 2008 by Richard Beddard
Filed Under Companies |
Wagon (WAGN) was the cheapest stock of all last month judging by its Naked PE ratio. You can buy Wagon shares for less than the profit that it makes in an average year. When investors place such a tiny value on a company’s earning power they doubt it will survive on the stock market, so why waste time on it?
I think there are at least two reasons:
- Investors might be wrong, in which case the recovery should be spectacular, and…
- They might be right, and we can learn from failing companies.
Wagon makes body parts for cars and trucks; doors, frames; glass roofs and shades, hinges and locks. Its biggest customer by far is PSA Peugeot Citroen.
Although there’s so much competition, customers regularly negotiate prices down, that’s not enough to deter a bloody-minded contrarian investor. Neither is the potential for rising costs, steel prices say, to squeeze profit margins. Neither, even is Wagon’s reliance on one manufacturer for half its sales, or falling car sales generally.
How do I know? Wilbur Ross Jr, aka the “dean of vulture investing”, underwrote Wagon’s recent rights issue and took his own stake in the company from 15% to 86%. Mr Ross is by some accounts the US’ foremost expert on bankruptcy and master of the quick turnaround. He runs WL Ross, a private equity firm.
Wagon also passes two important tests:
- It sells something we need, and…
- Business appears to be improving. Piotroski’s F_Score measures criteria like return on assets, cash flow, working capital movements, gearing and profit margins. The higher the F_Score, the stronger the company’s financial position and the greater the potential for recovery. Plugging its 2008 results into the formula, Wagon scores seven out of nine.
So why the extreme pessimism? Perhaps there’s a ‘smoking gun’ that would prevent investors benefitting even if business improved, or threatens catastrophe if it doesn’t.
It could be double barrelled.
As well as the rights issue, Wagon’s raised cash by selling its plants and leasing them back from the new owners, and by ‘invoice discounting’ – borrowing against money owed by its customers. So, while it’s paying off debt and returning to profitability it’s financing that by selling off assets. Should business deteriorate again I don’t know what it would have left to fall back on.
It would be tempting to follow Mr Ross’ lead. He’s an expert on bankruptcy, a “master of misery”, and as non-executive director, he sat in twelve out of fifteen Wagon board meetings last year. There’s nothing we could know that he doesn’t. But there’s a big difference between Mr Ross’ position and other shareholders. He’s in control, and only just shy of the number of shares he’d need to force the remaining shareholders to sell him their shares.
Since Mr Ross is chairman of International Automotive Components, a company his private equity firm pieced together from distressed auto parts companies around the world, its easy to imagine Wagon, or bits of it, becoming part of his master plan to build new world class auto parts businesses.
Because so few of Wagon’s shares are in public hands, it can no longer remain on the main market and in October it’s re-listing on AIM. Existing shareholders might do well to remember Mr Ross’ thoughts on AIM. Asked last year by the FT if it’s a dangerous market, he replied:
It clearly is a dangerous one…
…I’m certainly not saying that Aim should be done away with, but there is a risk when you have materially lower standards, that you’ll attract the wrong kinds of people.
New investors tempted by Wagon’s bargain status might also heed the words of a vulture investor:
The only time you really know you’ve reached the bottom is when you’re back on the other side and things are going back up.
Not yet, then.
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