Printing itself out of trouble
Posted on July 6, 2009 by Richard Beddard
Filed Under Companies |
In practice:
Buying when there’s ink in the streets
You only have to look at the BPIF’s Quarterly Outlook [PDF] to see how bad things are in the printing industry. Its survey reveals the sixth successive quarter of negative sentiment and reports staff cuts and frozen wages. Even though costs have fallen recently, prices have fallen further.
So why were profits only down 7% at printing.com (PDC)? A high street printing chain which, from its shop window, looks very similar to any other print shop.
Perhaps it’s printing.com’s promise to save customers money. This table on the company’s website is a year and a half old but it shows how low prices are fundamental to printing.com, and not just something it does in a recession.
Apparently, it can keep prices low, and quality high, because of a unique combination of centralised printing (at a recently upgraded hub in Manchester) and proprietary software invented by the company’s chief executive, Tony Rafferty, in the early 1990’s. printing.com’s five-year old AIM prospectus [PDF] explains in some detail, but the essence is mass production of business cards, flyers, brochures and stationery.
The prospectus also describes printing.com’s franchise model, which shields the company from start-up costs and poor performance, perhaps at the expense of higher profits once a store matures. The majority of its franchises are ‘bolted-on’ to established print shops which continue trading independently, but also offer a printing.com option.
It’s difficult for private investors who are often jacks of many trades, but masters of few, to see through the holes in an innovative business model, and easy to be seduced by business that seem like a good idea.
My defence against the temptation of ‘story stocks’ that ultimately fail to live up to the story is the company’s record. printing.com has a five-year record on the London stock market, and a seven-year record of profitability. Mr Trafford’s record goes back to his student years, publishing flyers to promote events, and the company he founded soon after he left university in 1992, which printed flyers for discos and night clubs. That company later became printing.com.
printing.com’s history might tell us a bit about Mr Rafferty’s qualities as an entrepreneur but it doesn’t tell us much about how well the company will survive in a recession (the previous UK recession was in 1991 and even in the not-quite-a-recession of 2003 printing.com was at a very early stage).
But printing.com is entering the recession in good shape. I reckon it’s F_Score, a measure of financial strength calculated from its last two annual reports (up to the end of March this year and including five of the six quarters described by the BPIF as “dire”), is eight out of nine. Management was so confident it increased the dividend (now yielding almost 10%) and paid a special dividend on top.
Investors presumably don’t believe printing.com will be able to pay out dividends at this level in future, otherwise they’d buy the shares for the income alone, pushing up the share price and reducing the yield. That’s if the market is efficient and investors behave rationally.
On the other hand, Mr Rafferty and his fellow board members seem confident, so maybe there’s an alternative explanation: Investors are so gloomy about printing, they haven’t the time or motivation to appreciate the virtues of printing.com’s business.
Is the market right, or the company’s board of directors? While printing.com’s on a five-year PE of ten, i.e. floating on the edge of bargain territory, it’s tempting to take that 10% yield and the share price rises that should follow if the company muddles through recession profitably.
In theory:
Construction’s lost decade
A warning for T Clarke followers. The construction industry is facing a lost decade says the Construction Products Association.
Marco Annunziata, chief Economist at UniCredit Group, posts a defence of the Efficient Markets Hypothesis.
Graeme says markets may be inefficient, but only for a while.
Monevator asks, “What are growth investors looking for?”
Robert Peston explains why bankers aren’t worth it. The ‘profits’ they made investors have been wiped out, and they were just based on leverage anyway. So why are we still paying them so much?
Comments
2 Responses to “Printing itself out of trouble”
Leave a Reply
Have to admit I sold out of T Clarke on the profit warning at around break even. I’m worried the late-cyclicality is just coming into play. So they’re going to spend the cash continuing to pay the dividend and buying back shares? Fine, but it was my cash anyway.
Printing.com keeps coming up. Will have to take a proper look sometime.
That’s the risk, Monevator, it’s a good point and they’ve gone down as a result of the profit warning since I wrote this.