A pleasant St Ives

And a bad memory

Just on a whim really, I calculated the median values for some of my favourite financial statistics and then screened the entire market for for companies that were above average in every respect.

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St Ives has delivered a nightmare

Same old story

My method of company analysis involves copying data and facts into a spreadsheet, generating the charts and statistics you read about in these articles, and then weighing-up the risks implicit in any investment. Usually, there’s not much weighing required. Either a company is obviously a good addition to the Thrifty 30, or it isn’t. If it isn’t, diminishing returns kick in. I might, through more research, gain confidence, but It will take a lot of work,and I’m probably better off moving on to the next company.

I started off feeling positive about St Ives (SIV). It’s an established business, its F_Score is a titanic eight out of nine, and a non-executive director recently bought a modest quantity of shares. A high F_Score is a strong sign a company is turning around, and director buying can be too.

In fact, the F_Score, a measure of financial strength (or stress) would be nine out of nine if it treated debt a little differently. Although long-term debt increased from 0% of assets last year to a modest 5% this year, losing the company a point from its F_Score, short-term debt fell from 12% of total assets to zero. The company is less indebted, and it has longer to repay it or roll it over. That makes St Ives less risky.

St Ives produces 160m books a year and 400m magazines, but they account for only 41% of turnover. The other 59% comes from printing direct mail, brochures, CD slipcases, corporate information like annual reports, retail displays, exhibition graphics and advertising hoardings. It bought Occam in June, a database marketing company .

This time, as the spreadsheet filled, a pillow of uncertainty smothered my enthusiasm. All the charts slope from top left to bottom right. The only one I don’t mind sloping that way is price (pink line):

The annual report says St Ives is "delivering the dream" in the form, presumably of snazzy brochures, posters and other printed matter. It hasn’t been delivering the dream to shareholders though.

Like Northamber, St Ives has been eating into its assets to keep paying dividends, but unlike Northamber, it’s not unambiguously cheap. True, the share price is below book value (0.7) and only four times average earnings, but those figures may be optimistic given St Ives’ history of writing off book value, a cost not included in the adjusted figure I use for earnings. St Ives is no ultimate bargain because current assets add up to a fraction of total liabilities thanks to a large pension scheme, which is in deficit.

The sell-off continued in 2010, as the company closed and consolidated sites, and put them up for sale. Its strategy is to move away from traditional print markets where prices are under pressure because the economy has contracted, and the market is shrinking because information is increasingly digitised.

The acquisition of Occam, shows diversification is St Ives’ survival strategy. It allows the company to become more involved in marketing campaigns, managing the data as well as printing the promotional material. Its book publishing business also distributes the books, prints them on-demand, and supports distribution of e-books. It not only prints Time Out but managers direct marketing campaigns, prints display material, and distributes the magazines. When Honda dealers order brochures they can use St Ives’ web-to-print system to customise them.

The first page of the annual report declares:

There is definitely more to us than meets the eye.

And there is, but I’m not sure that makes the company a good investment. Although this could be the moment St Ives stops eating itself, and starts building itself, I can’t confidently predict that. Its declining market, and shifting strategy means the business remains speculative, even if its finances are less so.

I’m not adding it to the Thrifty 30, for the second year running.

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As I was going to (buy) St Ives

I wondered whether it would survive

It’s doubly ironic that St Ives (SIV) chooses to feature a direct mail campaign promoting Google Maps in its annual report.

Admittedly it also devotes pages to a giant carrier bag it made to promote Sainsbury’s Finance, brochures for the Brooklands Bentley car, a peelable front cover for Wallpaper* magazine inviting readers to remove the clothes of the cover model, the latest Dan Brown book, and a trade stand for GlaxoSmithKline.

But Google? A company that makes most of its money selling inkless advertisements, and gives people unfettered access to online books and magazines that St Ives might otherwise print, and music and video that St Ives might otherwise package?

That Google still needs direct mail is positive for a printer, I suppose, but in every other way, the Internet has probably worried St Ives shareholders since the shares peaked in 2000. Analysing St Ives is forcing me to reconsider the companies I’ve reviewed that profit from print.

Some print, some publish, and some distribute. St Ives prints and distributes. Unlike Haynes Publishing, it doesn’t own information, but like say Communisis, it stores and sends mailshots (and books etc.). Unlike, UKMail, it doesn’t actually deliver them.

Of these companies, I’ve only included Haynes in the Thrifty 30 portfolio although judging by the numbers at the time all of them were reasonably cheap, and strong.

Haynes, which publishes motor manuals, has adapted in recent years. It no longer prints its own manuals, and it provides its vehicle blueprints electronically too. While mechanics still need Haynes data I think it still has a business, Haynes just has to work out how to charge for it and how to deliver it.

Printers face a different problem. Digital media is replacing their product, and in their darker days they must wonder if they face extermination.

Many of the markets for printed material, from CD inserts, to magazines, to direct mail, are shrinking. Although potboilers seem to be holding out against the digital onslaught, and advertisers will probably keep sending us mail until the last person opts out, printers are scrapping over a diminishing pool of profitable businesses. To compete, companies must invest in modern equipment and shut down old and unproductive factories. Fluctuating energy and raw material costs add to the uncertainty, and costs.

I don’t think there’s any point in speculating on how much smaller the print industry will be in future, it seems only safe to assume that profits will be substantially lower and so, while a company is normally a bargain if it costs less than ten times average earnings, shares in a printer would have to be cheaper.

Thanks to recession, St Ives shares cost just 2.5 times its average earnings over the last ten years, or about thirteen times 2009’s profit figure, ignoring exceptional costs. But, also thanks to the recession, its F_Score is a borderline five out of nine.

While it doesn’t look like it’s going bust, St Ives is financially challenged.

In 2009, it lost money for the first time since it listed in 1985, if you include exceptional costs from the sale of its US and Dutch subsidiaries and the closure of two factories.  Even ignoring those costs, profitability fell sharply from a 7% return on total assets to 2%.

Some of the decline is reversible. In recessions magazine publishers close titles, order fewer copies, and cut the number of pages in each one. During recoveries they expand the number of titles, their print-runs, and their publications. Likewise, in a recession retailers, which use printed materials to promote products in stores, fail or become more demanding, and when they recover, they grow.

But there are risks. Although St Ives reduced its debt, it still owed £33m at its year end in July. While it reduced its pension deficit, it still owed its pension scheme £38m, a figure that varies as the value of the pension fund and it’s obligation to current and future retirees fluctuates, and as St Ives makes monthly payments at a rate of £2.2m a year.

These liabilities are another drain on the company’s resources, especially if recovery is muted.

Like Wolseley last week. I’m tempted to add St Ives to the Thrifty 30 model portfolio. Investors may have overreacted to the combination of recession and the perception that print is dying. While I can’t conceive print will ever be a go-go sector, there may be a few puffs left in the old cigar-butt.

But I’m not sure I want to smoke it.

My stockpicking checklist has three items at the end of it. That:

1. The company is financially strong,
2. It’s not facing overwhelming competition, and…
3. The shares are cheap and liquid.

While the shares are very cheap, I’m just not confident enough about the business of print.

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