SCS Upholstery: So boring I can hardly bring myself to write about it
Posted on March 10, 2008 by Richard Beddard
Filed Under Companies |
It’s been a real struggle this week*1. On Monday, I wrote about ten boring companies in deep trouble. Then I picked SCS Upholstery (SUY), possibly the dullest of the ten, and wrote an iBall script about it (now a programme*2). Then I watched this video of Walter Schloss, perhaps the archetypal value investor, which reminded me that if you plough the lonely furrow of value investing too deeply you turn into a quaint old gnome, alone in a beige office*3.
The loneliness of the long-distance contrarian
Then two investing pals emailed me about my contrarian crusade.
Peter Temple, a grandee of the UK private investing scene, said:
Liked the blog, although I can’t say I am wild about any of the companies you suggest.
Why buy companies like this when there are so many good ones around on low ratings that have not blotted their copybook with profit warnings and dividend cuts?
Robin Soole, the biggest supporter of this blog, agreed:
I have to agree with Peter I am afraid. I would not buy any of these companies; however they do serve as an interesting study for value investing, which is, of course, why you wrote about them.
And now I’ve sat down to explain why I picked on the stupefyingly tedious SCS when even Martin Kemp (he starred in the ads) probably wouldn’t buy a sofa now. The problem with boring companies in trouble is that no-one wants to know about them. And frankly, although I’m genuinely considering SCS for my own portfolio, faced by the task of writing about the company again I feel like I’m staring at the most repulsive plate of broccoli and spinach pie and Mum won’t let me have any pudding until I’ve finished.
The stronger that repulsion is, the more interesting the company (technically speaking) because repulsion depresses share prices just as surely as hype pushes them up. Low share prices are what value investors want (remember: buy low, sell high), as long as they don’t remain low forever.
SCS Upholstery at last
So, let me answer Peter using SCS as an example. Incidentally he’s amply demonstrated he can pick winners on the Interactive Investor mothership where all five of his model portfolios are beating the stockmarket, so this isn’t an exercise in one-up-manship, I’m just explaining myself.
First, the bad news. SCS has blotted its copybook:
- In a yearlong sequence of profit warnings it’s blamed logistics problems, bad weather and the ‘credit crunch’ for falling sales and margins.
- The company says profits for 2007 are likely to be near the lower end of analysts expectations. Analysts don’t expect there to be much profit.
- It’s scrapped the dividend…
- …And it’s deferred its new store opening programme, and most of its store refurbishment programme.
Second, the good news:
- The share price has fallen 91% and the shares now trade on a long-term price earnings ratio of 2.
- The value of the company on the stockmarket is about half of its tangible book value.
- It has no debt…
- …And, historically, cash flow exceeds profit
You can buy the company for two times its average shareholders’ profit over the last nine years. If SCS returned to its historical level of profitability an investor paying the current price would be getting a notional return of 50% a year*4.
Of course, if its share price falls to zero because the company has gone bust, an investor paying the current price gets an annual return of nothing at all, and finds out exactly how much those assets (mostly property leases) are worth, when they’re sold-off.
But I think this is the kind of situation where the rewards implicit in a bombed out share price (that should recover) far outweigh the risk (that it might never).
Not much of a story
Although SCS may have to weather a few bad years as the economy turns down, credit companies become more stingy, and customers let their lounges go to seed rather than stump up for a new settee, I think it has every chance of recovering. In a few years time we’ll still be sitting on sofas, they’ll just be a little tattier, and we’ll be that much keener to replace them.
That SCS has a good record of making money out of sofas, no debts for bankers to call in, and has already acted to conserve cash by cancelling the dividend and deferring investment, gives me confidence it will survive and management can be trusted.
Of course events could turn out differently, a widely anticipated recession may be worse than people think, or there could be hidden nasties in SCS’ admirably straightforward accounts. But on such a low multiple of its long-term earnings, investors have pretty much given up on SCS anyway so although the share price can go lower, the fact that it’s already so cheap is comforting.
Not much of a story is it? Nowhere near as exciting as the platinum mines, palm oil plantations and soya bean funds currently in vogue, propelled by scary stories about resource shortages. It’s not always the gripping stories that present the best investment opportunities, though.
Walter’s wisdom
Yes, it’s been a boring, lonely old week thinking about sofas. But something cheered me up at lunchtime. I’d paused for a cheese sandwich and to watch that turgid video of Walter Schloss. Near the end he mentions an article in Forbes last month, featuring six of his (US) stock picks. The first of the six (it’s an alphabetical list) is Bassett Furniture Industries, a loss-making furniture retailer and manufacturer trading at 0.6 times book value. His comment:
Consider buying if dividend is cut.
No worries about blotted copybooks there then. He’s waiting for the bad news and, presumably, a sell-of, so he can get in at a better price. Perhaps I should tell him about SCS!
Footnotes:
- Because this blog is linked to an iBall episode, I’ve published it a week after I wrote it to coincide with the broadcast.
- Amazingly I got it past the editor, because iBall is supposed to be fun and exciting, but to add to my misery, Steve McDowell, commandant-in-chief of Interactive Investor replaced my crafted denouement with an ending he pinched from Les Dawson.
- No offence to Walter Schloss. He’s one of the great value investors, and he’s wearing well for a 91 year old. My point is, being contrarian is not a route to fame or adulation, except among a very small group of people - most of whom don’t get out much.
- Of course it’s not quite that simple, as shareholders don’t receive all of the shareholder’s profit directly in the form of dividends. But since the alternative is to reinvest it in the business, which belongs to shareholders, investors should get the rest of their return from the growing value of their shareholdings.
Comments
7 Responses to “SCS Upholstery: So boring I can hardly bring myself to write about it”
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Interesting idea. Could you advise where to get the latest balance sheet? I was able to located just their annual report with mid 2007 numbers… 16% or so decrease in sales for subsequent half a year…
Hi Petras, thanks for your comment. I was beginning to think I’d bored everyone to death. Unusually SCS doesn’t have all its reports on its website. I asked the company for print copies of the recent reports but if you only want the latest annual report you can get it through our annual report service as a pdf: http://www.iii.co.uk/investment/detail?code=cotn:SUY.L&it=le
Just click on the link that says Annual reports above the Summary info on the SCS page.
Hope that helps,
Richard.
Dear Richard,
Please keep on finding deeply dull companies, and writing about them. In 30 years as an investor, many of them as a City profiessional looking after private clients, I can say without hesitation that I’ve made more money, for myself and other people, by buying dull stocks when nobody else wanted them, than ever I have by investing in something that everyone else already liked.
Since you mention palm oil, I remember I started writing about the companies which now make up MP Evans back in 2000, as totally overlooked asset plays. Nobody showed a flicker of interest, and I accumulated stock slowly by buying up the scraps that came on offer. Today, the resulting MPE shares are worth 10 times what I paid, and I’ve had cash and divis out along the way.
Richard,
This is a classic “recovery” play. SCs may be a boring company for investors, but the public love their prices. Without significant debt the “down-side” risk on the share price is minimal. As and when consumers return to the high street “en-masse”, this will be a “growth” story. As you said they have done all the right things in cancelling the dividend, and postponing the expansion and re-furbishment. Unless there are some “black holes” in the accounts, they will not be going bust.
Hi tiredoldbroker and John
Thanks for you comments. It’s fascinating isn’t it, watching sectors come and go. During the tech boom the word ‘utility’ was almost a slur, growth investors applied it to any company that wasn’t expected to grow. Then a year or two ago they were all the rage, and tech stocks were at an all time low. Now its resources stocks. Of course traders know they’re playing the greater fool theory but long-term investors who buy these companies on the hype are probably in for a nasty surprise and a long wait.
John, your comment about Molins on another page (Ten boring companies…) reminds me about what I think is a cardinal rule of contrarian investing and I think it was Ken Fisher who first put it into my mind. That is to be a successful contrarian investor you don’t do the opposite of what the market is doing (buy financials now, for example), but do something completely different - look where nobody else is looking. Engineering, perhaps.
tiredoldbroker. It sounds like you were almost alone in looking at plantations in 2000
That said I’ve just checked, and according to Sharescope there are still no analysts covering M.P. Evans!
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