Haynes Digital Survival Manual

Fit to hold

Having bailed on Bloomsbury yesterday, I’m holding Haynes today. Both are publishers facing the familiar challenges as book publishing follows music into the digital future.

First, my biases. Haynes is an old favourite. It was the first company I profiled in my Money Observer Share Sleuth column and it was an inaugural member of the Thrifty 30. The day John Haynes OBE telephoned to point out an error in an article, was a big day for me.

I find it hard to browse the Haynes catalogue without buying a load of books. Not the iconic car manuals. They look great, but like most modern cars mine is complicated and, like most modern drivers, I’m not up to the job of maintaining it. Not the motorsport titles (yawn).

Haynes has a manual for just about every human interest these days. The Royal Marines Fitness: Physical Training Manual is on the list I’m preparing for Father Christmas (look at the reviews).

These are reasons to be wary of everything I say. Liking the product is a good thing, but it can also blind you to certain fundamentals (here’s the spreadsheet ).

Haynes has done a good job for investors over the last ten years, compounding shareholder wealth (the combined total of the cumulative dividend since 2002 and the company’s net assets owned by shareholders) at 10% a year.

Rather like Bloomsbury, profitability has declined in recent years, but 12% return on equity seems respectable to me given the economic circumstances. Haynes’ new chairman, J, son of John, says the company has been focusing on financial management during the recession but is emerging with a renewed operational focus now, employing front-facing display stands in retailers, and developing the Haynes Manual Online platform (it’s launching 50 of its most popular US motor manuals online this year).

Front facing display stands may not seem like a big deal, but people do judge books by their covers, and the Haynes covers are fabulous.

The DuPont chart tells the same story, although the scales aren’t particularly helpful! Of the three components of return on equity, profit margins and asset turnover have taken modest hits, but at least the company hasn’t resorted to taking on debt to boost return on equity.

I have the same problems appraising Haynes as appraising Bloomsbury, the past will not resemble the future as car maintenance is increasingly done by professional mechanics and readers switch to eBooks.

That’s why I think buying Vivid in the depths of the credit crunch was such a smart move for Haynes. Vivid, based in Holland, claims to be the leading supplier of European technical information to garages and workshops in electronic form. This year, its managing director Alex Kwarts has been promoted to the main Haynes board. It means Haynes is both an IT company and a publisher, which I think all publishers need to be. It also means Haynes is supplying car schematics, whoever services your car. And finally it extended Haynes core business from its English-speaking markets into Europe, and potentially wherever European languages are spoken.

Although the unpredictability of publishing is unnerving, it seems to me Haynes has positioned itself as well as any company could for change.

The pension fund is a blot on Haynes’ otherwise impeccable balance sheet. The total obligation of £33m is perilously close to the total market value of the company (£37m). The good news is the company has restructured the biggest of its pensions schemes, the £25m UK scheme, increasing contribution rates. The bad news is the scheme is still open.

So why Haynes and not Bloomsbury? Partly it’s familiarity, Haynes acquisition of Vivid seems more concrete than Bloomsbury’s ‘One Bloomsbury’ restructuring and the pace of change in Haynes’ corner or the market, large format graphic intensive books, seems slower than in general fiction and non-fiction, Bloomsbury’s staple.

But it’s mostly about value. Haynes’ return on equity is holding up better than Bloomsbury’s. Assuming Haynes can maintain current levels of profitability (12%) a Price to book value of 0.9 implies an earnings yield of 13%, which is good enough for me. It’s ten year average ROE, which, as in the case of Bloomsbury I’m ignoring, is 14%. That’s an earnings yield of 16%.

Get your good companies at cheap prices here

Thrifty 30 members Colefax, Castings and Haynes Publishing grace the tables

It’s reassuring to see seasoned Thrifty 30 members Castings and Haynes Publishing gracing the Thrifty and Nifty screens this month. Both shares have risen in price since I added to them to the portfolio but their continued presence in the tables suggests I should consider adding more. Colefax, I’ve just added:

NB: Here’s the Thrifty screen spreadsheet, you can find a short description of the screen on the shortlists page, and here’s a description of how to value a company using ROE and PB, and an explanation of Piotroski’s F_Score.

NB: Here’s the Nifty screen spreadsheet, you can find a short description of the screen on the shortlists page, and here’s a description of how to value a company using ROE and PB, and an explanation of Piotroski’s F_Score.

The two screens are very similar, targeting companies with profitable operations at cheap prices, but the Nifty screen puts the emphasis on consistent profitability. To construct it I instruct Sharelockholmes to exclude any company from the table that has failed to earn a Return on Equity of 10% or more averaged over every period it measures (1, 3, 5 and 10 years).

All that is required of a Thrifty company is that average profitability over the last ten years has been positive.

Otherwise, the screens are identical.

The Nifty screen seeks companies that perform in all economic conditions, hence profitability does not vary so much, they’re so-called defensive businesses. By allowing more variability, The Thrifty screen admits cyclical businesses that fluctuate depending on the economic circumstances.

If a Nifty company is also in the Thrifty table it’s particularly exciting as it implies the market may not be recognising the defensive qualities of the company (or there is something bad about it that is not captured in the statistics), which explains my enthusiasm for Castings, Haynes and Colefax.

Of the remaining Nifty companies, Latchways, which also features in both tables, looks most interesting. It makes fall protection systems for people working at height.

Although it’s hardly cheap by the conventional price to book measure, its supersonic record of profitability, albeit derived partly from leverage, is hard to ignore. Potentially Latchways is a niche business with hidden champion credentials.

Updates: Haynes, Northamber, Metalrax

A clutch of uninspiring announcements from Thrifty 30 members is unlikely to shift my opinion on the companies – either way.

Profitable un-indebted Thrifty 30 member Haynes Publishing publishes another set of results with headlines much the same as the previous set.
Still creeping towards the Haynes Manual Online. May be getting to grips with its pension scheme. It’s top two sellers were the: USS Enterprise Manual and Wallace & Gromit Cracking Contraptions Manual. The company’s come a long way since John Haynes cranked out copies of his first book Building a ‘750cc’ Special on the school Gestetner.

Downbeat results statement from box shifter and Thrifty 30 member Northamber reveals its first loss in eighteen years.
That said, it’s only just been profitable in many recent years and frequently uses its cash reserves to pay the dividend. Now the rate at which it is eating itself is accelerating. The chairman will not offer any optimism “for the near to medium-term future” as the company tries to reinvent its business model. The rather intractable question I have to answer when I review the company is do computer wholesalers have a future? And when did I start investing in reinvention?

To compound the misery, the FT’s Lex thinks the PC market is in the final stages of commoditisation.
Which explains why manufacturer HP is getting out of the market.

Interims at metal basher, and T30 member, Metalrax reveal bits of it have turned around enough for the company as whole to make a small profit.
Its export oriented engineering businesses are doing very well. Selling pots and pans in the UK high street, though, is more tricksome. Meanwhile Metalrax’s debt burden is tumbling, and so is its pension deficit, but mostly because of financial engineering. Metalrax is selling off properties and leasing them back, and pension obligations have fallen because of accounting changes.

Haynes disassembled

Feeling chicken

Haynes Publishing (HYNS) was a Share Sleuth pick at 172p in July 2008 (PDF), and one of the first Thrifty 30 picks at 183p in September 2009. A year later, the shares cost 263p. The portfolio’s original stake of £999 was worth £1,415 at Thursday’s close, and it’s also received £95 in dividends.

The publication of Haynes’ annual report this month, is my cue to reappraise the company’s position in the portfolio. Since the shares have risen 44%, close to the minimum 50% I expect over three to five years, I also need to consider whether the company will still be undervalued if the shares reach the 50% target soon. Otherwise, I’ll take the profit and add a different, cheaper, company to the portfolio. One which is, perhaps, less appreciated by investors.

That would be a wrench, because I’ve grown to love Haynes. It publishes the famous motor manuals, painstakingly drafted in its workshops by engineers working in teams of two so they don’t go crazy working on long projects. Founding director and majority shareholder John Haynes wrote and published his first manual at school in 1956 and started the company in 1960.

One of the joys of reading Haynes’ annual report is discovering the new excuses it’s found to publish a manual. Long ago it branched out from cars to motorbikes, embracing in more recent years subjects as diverse as sex, and Thomas the Tank Engine. This year, its 50th, it’s published a manual on itself, Haynes Publishing. I’ve ordered a copy, the first Haynes manual I’ve bought since I took my Citroen 2CV apart over twenty years ago. Despite owning the manual, I couldn’t put the car back together.

Predictably, I added Haynes because the shares looked cheap, the company was financially strong, and although fewer people seemed to be buying its manuals, partly because we’re richer, partly because cars are more reliable, and partly because they’re so complicated, Haynes was maintaining its relevance by reverse-engineering and explaining almost anything we’re passionate about. Meanwhile, its grip on the motor manual market, here, in the USA, and in Australia, seems like a profitable niche, and when it acquired Vivid, a Dutch publisher of digital schematics, it increased its appeal to garage owners.

I may have underestimated the rate at which Haynes is changing into a general DIY publisher, with a sideline in nostalgia. Judging by its forthcoming titles, and the most recent additions to its catalogue, very few of Haynes’ new books are traditional ‘Owners Workshop Manuals’. I count one, Audi A4 Jan 05 to Feb 08. The annual report pictures 28 books, but just eight workshop or repair manuals, four of which are about machines you’re unlikely to take a plug spanner to: Supermarine Spitfire, Hawker Hurricane, Apollo 11 and Roary the Racing Car. It also features manuals on chickens, physical fitness, the Fender bass guitar, and cricket, histories of Arsenal and Sunderland football clubs, and a rock music compilation for dads.

Although chief executive Eric Oakley says they’re, "very much the core of our global publishing business", Its motor manuals look a bit like a back-catalogue, which may explain why Haynes has installed a digital printing press capable of printing titles in smaller quantities, or on demand, as their popularity wanes.

In comparison to previous years, it’s been a fairly uneventful one at Haynes. John Haynes stood down as chairman in favour of his son J, which reduces the printing cost of the annual report by a few letters. John remains a director.

The company ends the financial year in good financial health. It’s F_Score is seven, just short of a perfect nine because of a slight dip in profitability. It ended the year in May with no debt, and more cash in the bank. The growing pension liability (up from £10m to £14m), which Haynes thinks may shrink when new pensions legislation comes in, is a concern but because Haynes has few other liabilities, it’s not a major one.

I don’t think Haynes’ business is invincible, though. Reading between the lines, the company is dependent on motor manual sales in the US but they have been falling for some time. Creative solutions like general DIY titles, print on demand, and multimedia may make up the lost revenue, digital distribution contributes about 13%, but we just don’t know. Haynes’ stable looking results belie a quiet revolution in its business.

Profits (blue lines) have fallen slightly in five consecutive years, which is excusable given the economic circumstances. Soon, though, the company must show it can reverse the gradual erosion of profitability (green lines) it’s experienced since 2004.

The shares cost ten times average earnings over the last ten years, bang on my arbitrary upper threshold for bargain status. At less than ten times earnings I’d add Haynes to the Thrifty 30, assuming it wasn’t already a constituent, even though the future is uncertain.

Above ten times earnings, and therefore at my 50% price target, I might consider replacing it with a more obviously undervalued company.

-

Thrifty 30 updates

The current Thrifty 30 portfolio

Auto engineer Ricardo announces its design, the Ocelot, is the MoD‘s new armoured vehicle.

Car transporter Autologic buys Autocarriers our of administration.

Haynes still worthy

A belated check 

I picked Haynes (HYNS) in July 2008 to be the first company profiled in a new column, Share Sleuth, for Money Observer magazine. Then, the shares cost £1.72. Luckily, as I hadn’t finalised the Thrifty 30 methodology then, it fits, so it was one of the first companies I included when I started the Thrifty 30 last September. Today the shares cost £2.15.

The motor manual publisher’s interim results are due out tomorrow (See the ***Update below), so it’s a bit late for my review of the full year results, announced in September. But, I intend to review every Thrifty 30 member yearly on the publication of their annual reports to check that the companies are still sound. It would take some pretty dramatic news in Haynes’ interims to change that.

The only news emanating from Yeovil since last September is that sales fell in the US and rose in the UK, its two largest markets, in the first quarter of this financial year, and John Haynes OBE is stepping down as chairman 54 years after he built an Austin 7 Special and wrote his first book about it. The new chairman is the current vice chairman, J Haynes, who I assume is his son.

The two are related, and since John Haynes has a majority shareholding including 9m ‘A’ shares, 55% of the voting rights, which can only be owned by family members, he can anoint pretty much anybody his successor.

Investors like a company’s management to own a meaningful stake but can be  leery when they are in control lest they vote through measures against the interests of smaller shareholders. If you worry about that, the chairman’s enthusiasm for the shares at their lows in 2008 and 2009 will be doubly disconcerting. Over the course of the financial year he bought nearly 400,000 of the ordinary shares taking his ownership to almost 800,000.

I think It shows confidence (and a good sense of timing), and since the company was already controlled by the man who bears its name, it makes little difference. In any case, John Haynes has been a good steward of the brand he created, judging by the company’s performance over the last decade.

The chart shows profit and the ratio of shareholder’s equity to assets, relative to their levels in 2000. In May 2009, the balance sheet date of the last annual report, the company was in good financial health. It had an F_Score of eight out of nine, and its ratio of equity to assets was 66%, meaning the value of the company’s liabilities, what it owed, was only 34% of what it owned.

In 2001, Haynes made a small loss. It had bought Sutton Publishing in the UK and Chilton in the US but economic slow-downs on both sides of the Atlantic meant retailers were destocking its titles, just as Haynes had acquired more. Since then it’s jettisoned Sutton, which was a general publisher, and sought instead to make the most of its reputation in motors and DIY, taking the manual format into brave new territory like sexual health, fitness, and manuals for hardware you might only work on in your dreams.

Destocking has re-emerged since 2007, and may explain the dip in Haynes’ performance over the last few years. Although Haynes thinks more people are buying its manuals and repairing their own cars because of the recession, so far it hasn’t been enough to offset the actions of retailers equally keen to conserve cash.

An alternative explanation for declining motor manual sales is that cars are more reliable and complex these days, so we’re more likely to employ a mechanic than buy a manual and maintain our own cars. That’s why Haynes bought Vivid in 2008, a Dutch supplier of motor schematics and data to European garages and workshops over the Internet and on DVD. Vivid accounted for less than 10% of Haynes’ sales in 2008 but it gives Haynes an opportunity to augment Vivid with its own data and launch new electronic products in many languages, that may not be profitable as print publications. Meanwhile, it’s invested heavily in its digital printing presses in Nashville which should enable shorter print runs and keep relatively unpopular titles in print longer.

The recession is officially over for now, so it will be interesting to see whether Haynes says there has been restocking since it last commented in October. Short of a disaster tomorrow, though, on a 10 year PE of eight, Haynes still deserves its place in the Thrifty 30.

***Update:

The results are out, and there are no bombshells. My biggest concern, which I didn’t mention in the article, is the pension deficit which increased by nearly £5m to about £15m. The interims don’t mention the overall size of its pension obligation but at in May 2009 it was £25m so it must be creeping up towards the value of the company. If you value the A shares at the same price as the ordinary shares, that’s about £35m and for no better reason than you must draw the line somewhere, that’s the point at which I let the size of a pension obligation worry me.

The best performing part of the business is general book publishing, mostly transport related, for example biographies of Stirling Moss, Ross Brawn and Jenson Button, and manuals on the Apollo 11 and Thomas the Tank Engine, but also books published under a license with the Daily Mirror using its picture archive, for example Jackson Unveiled. Sales were up 18% but Haynes doesn’t say how significant they are relative to the core motor manuals.

There’s no restocking in America, but overall sales and profits are up on the first six months of last year.

-

Small print destroyed the free market 

Dan Geldon says the heirs of Hayek and Friedman created a market free of government intervention so they could clog it up with complex legal arrangements that allowed them to maximise their profit.

What’s the use of active fund managers in an efficient market? They reward good management with a high share price and punish bad management with a low share price. No wonder John Bogle’s angry. They haven’t even got that right.

Don’t worry about the population time bomb, says Hans Rosling, we know how to stop population growth. Stop people in impoverished countries dying.

It makes you laugh: Credit Suisse fined for not being in control of its own algorithms.