Put on your body Armour

Glass half full

You’d expect a company that designs and distributes audio visual equipment for homes and cars to be a casualty of a recession in which car manufacturers went bankrupt and house builders stopped building, but whether you classify Armour (AMR) as a casualty depends on how you look at the company.

Its share price is back down below the level it was in 2003 when it bought a handful of home electronics brands, Veda, QED and Goldring, moulded them into its Armour Home division, and the shares quadrupled in value. At the height of the market panic last year, though, the shares fell as far as 7p, more than 90% lower than their peak, and although they’ve doubled since, the fact that they cost less than five times average earnings suggests Armour might still be on the critical list.

It’s not, though. Not as far as I can tell. Armour has been profitable for the whole of the last decade, including 2009, and while profit margins halved and profits fell dramatically last year, the company is still profitable. By cutting costs, including 15% of its staff, it increased cash profit which it used to pay back some debt. Although it only scores five out of nine for financial strength using the F_Score, which is the minimum standard for inclusion in the Thrifty 30 model portfolio, the signals it scores well on, profitability and debt, are the most critical ones.

The chart shows the vertiginous climb in profit that may also have been precipitated by the ban on using mobile ‘phones while driving unless they are used with a hands-free kit. Armour supplied the kits. It also shows the subsequent decent and an 11% decline in the ratio of shareholders’ equity to total assets, from 72% to 61%. The ratio may have declined, but the shareholders’ interest is still pretty healthy, and in absolute terms it’s risen from £8m to nearly £30m over the decade.

The big question is whether that mountain of profit, much of it retained by the company to fund future growth and accounted for in shareholders’ equity is a one off. Although the UK economy, and therefore house and car purchases, seems unlikely to take off, and chief executive, George Dexter, fears we may experience a second dip in 2011, he’s bullish about R&D, saying the company invested record amounts on new product development in the annual report.

If the company is as successful predicting what its customers, 6,000 UK retailers, commercial vehicle manufacturers and house builders, want as it was in last decade, then profits should recover eventually. At least the board has tasted success, the current directors were responsible for that mountain.

This time, they seem particularly enthusiastic about the Q-TV2, a speaker system for flat screen TVs, but they’ve got their fingers in a lot of pies, from furniture and TV stands, to headphones,  multi-room entertainment systems, in-car DVD players, and antennae, most of them brands they own.

An alternative scenario might be playing on the minds of investors though, that Armour’s profits won’t recover substantially and it will have to write off some of the value of the businesses it acquired to make Armour Home. That could turn the mountain of shareholders’ equity into more of a mole hill and make the company look a lot weaker.

My theory is Armour’s decline is temporary and, during the sell-off in 2008 and 2009, its market capitalisation fell so far that now, at £10m, it’s too small for most investors to bother with. Its exchange market size is only £440, which means if you want to buy a bigger stake than that you might have to pay over the odds. It also means the shares could be difficult to sell near the market price, when the time comes. If that’s not bad enough, the spread, the difference between the sell price and the buy price, is high, about 10% of the mid-price, meaning the moment you buy the shares, they’re worth around 5% less than you paid.

Armour’s liquidity and financial strength are borderline, but I think the shares are cheap so I’ve added them to the Thrifty 30 at 14.7p, which is the actual price quoted by my broker. And I’ve deducted £10 for him, and £5 for the tax man.

I don’t think it will be an easy ride, though, hence the title of this post. I think other investors will need to see profits rising again, before they buy shares in such an unfashionable company.

-

Thrifty 30 updates:

The current Thrifty 30 portfolio

Take heart. Non-executive director Mark Laurence bought 100,000 shares in Dart at 45p per share, 9p less than the price when I added them to the Thrifty 30.

Churchill China issued an unruffled trading statement.

Interim results from Waterman reveal wintery conditions persist in commercial property.

Snow forced Printing.com stores to close earlier this year, but the company says results should be ‘broadly inline’.