Recruiters flirting with the buy-zone
Posted on April 24, 2009 by Richard Beddard
Filed Under Companies |
In practice:
Directors wheeling and dealing
With 2,802 companies on the London Stock Exchange to choose from, knowing where to start is critical if, like me, your aim is to research lots of them. Regular readers know I increase my chances of stumbling on a worthwhile company by shrinking the pool from which I’ll pick, so typically it contains companies with:
- Long records of profitability
- Low prices in relation to profits averaged over five to ten years.
- Financial strength. Preferably they own more than twice what they owe, and they’re showing signs of getting stronger.
- Recently published annual reports, so the facts and figures are up to date.
I think it’s a safety-first approach.
After that, I look at the chart to get a sense of the history of the company, check the figures and read the annual report to make sure I understand how it makes money. Occasionally I’ll call the financial director for clarification, and very occasionally I might call an analyst or an investor. Yesterday, for example, I called Pensions Corporation, about its stake in Aga.
All of the time I’m looking for information to support, or undermine my working hypothesis; that the company is a good one, and the price is cheap.
One of those secondary pieces of information can be directors’ dealings. And the first thing I noticed when looking at the directors buys and sells plotted along the top of this chart copied from Sharescope, a computer program, is what clever traders Robert Walters‘ (RWA) directors have been. The confines of our blog page means some of the trades are obscured, but its clear that, as a group they have bought low, and sold high:
You’d hope company directors would have insight into prospects for their businesses and academic studies show they do, in aggregate. But as bankers have demonstrated, some of whom invested large amounts of their wealth in the banks they destroyed, we shouldn’t follow them blindly.
Three recent trades by senior directors after the recruitment company published its results in March, were substantial. Robert Walters, the chief executive who founded the company in 1985, bought £118,000 worth of shares. Giles Daubeney, chief operating officer, bought £40,000 worth, and Alan Bannatyne, group finance director, bought about £15,000 worth. The directors owned just over 5% of the company on 5 March, which makes them committed, which is good, but not controlling, which is also good.
Although the price is 25p higher than the 82p they paid, the shares are still on a 10 year average price earnings ratio of 11, which includes a previous recession in the recruitment business during the dot.com bust of 2001-3.
Since profits colapsed in those years and Robert Walters didn’t pay a dividend, it’s fair to speculate that the same thing or worse could happen this time, should the recession last all year or beyond in in the Asia Pacific region, the UK and Europe. In 2008, which started strongly and finished weekly, profits fell by a quarter, cash flow by just over a tenth, and the company held the dividend.
Valuation is an imprecise art but ten times earnings (an earnings yield of 10%) is unambiguously cheap for a financially strong company, I think, and since Robert Walters had net cash of £22m at the end of the year it probably fits the bill.
Its average earnings per share over the last ten years is 9.73p, so an ‘unambiguously cheap’ price would be 97p. The directors got in under that last time they bought, but yesterday’s close was 11p higher. Since recruitment is a notoriously cyclical business and the economic news could well get worse, before it gets better, I might be a stickler for 97p.
But it’s only pennies away…
In theory:
Wrong models: Conspiracy or cock-up?
Edmond Jackson can’t value Barclays. Benjamin Graham would give it a miss, he says, because it’s not ‘investment grade’, but it’s an interesting speculation.
Credit analysts at BNP Paribas say equity analysts focus on the wrong kind of earnings and are comparing equities to government bonds instead of corporate bonds, Share’s aren’t cheap, they’re expensive.
Jeff Matthews has collected ten good questions for Warren Buffett. I’d like to know the answer to question three; how does he justify holding companies “forever” when businesses change beyond recognition?
Professor Daniel Kahneman says financial models give investors security, like maps help mountaineers navigate. The problem was they had the wrong map, and the problem is there may not be a right one.
Conspiracy or cock-up? Simon Johnson, an economics professor, former director of research at the IMF, and co-blogger at The Baseline Scenario, thinks the financial crisis is a conspiracy.
The Interactive Investor mothership has launched StockTwips, a service aiming to capture the twittering potential of UK investors by collecting all the tweets with UK ticker codes in them. You can also catch up on Budget chat.
The Daily Mash says the recession is to be Susan Boyle-shaped.
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[...] said that, investors seem to be putting a lot of faith Robert Walters’s larger business. Maybe it earns more of its income abroad, and from contract staff, but is that [...]
[...] director deals, significant shareholdings, and whether insiders have control. Ditto, see Robert Walters for commentary on directors deals and Dewhurst for significant [...]