Transporting Autologic to a more profitable future

The cockroach survives

Like French Connection and Johnson Service, Autologic (ALG) is a Naked PE alumnus. In February 2007, May 2007, August 2007, November 2007, and February 2008, it was one of very cheapest stocks on the stock market according to Dr Keith Anderson’s extreme PE statistic.

I didn’t consider it for the Thrifty 30 then because it didn’t look financially strong enough. A few years on though, the company has survived round one of the credit crunch, possibly but not certainly the only round, and though you might not believe it from the share price, it’s looking stronger.

Autologic prepares, adapts, stores, transports and refurbishes vehicles for manufacturers, mostly, through centres in the UK, Belgium, the Netherlands, and the Czech Republic.

During the recession, the motor industry went into a crisis I’ve documented when profiling engineering companies Castings and Ricardo, both in the Thrifty 30 portfolio. But Autologic’s problems go back much earlier. All my charts, price, profitability, profit, and financial strength show a company in inexorable decline for most of the last decade.

Although it may have been operating profitably (light green line) for most of the last decade, it wasn’t if you count the exceptional items (light blue line) ignored in the adjusted figure (dark blue line). I haven’t been through a decade of annual reports to find out why, they go back to 2003 on Autologic’s site, but I have glanced through some of the key developments. Humiliating exits from businesses in Spain and France in 2007, the French subsidiary went bust, the cancellation of a major contract with Ford, and the prolonged and ongoing reductions in the number of drivers and transporters the company employs may also explain the exceptional costs and how the company is worth no more in accounting terms than it was ten years ago. The decline in financial strength (dark green line) would have been worse had investors not chipped in £12.1m when the company sold new shares in 2006.

But new management seems to have stabilised Autologic, at a smaller scale. 2009’s results indicate the company is growing stronger. It was more profitable in cash and accounting terms, and less indebted, than in 2009. It’s F_Score is seven out of nine, eight out of nine if you ignore a small amount of shares issued to reward executives. Since the company costs just over one times average (adjusted) earnings over the last ten years, statistically speaking Autologic is the perfect Thrifty 30 company, as long as the new managers are what they seem, more prudent and conservative than previous ones.

Chief Executive, Avril Palmer-Baunack and finance director Andrew Somerville joined the company in November 2007 from Universal Salvage, a company they turned around and sold to Copart. They’re joined on the board by Mark Butcher, a non-executive director who is UK investment manager of activist value investor Guinness Peat. Guinness Peat is the largest shareholder in the company, owning 26.2% of the shares, and has been since the placing in 2006. It wouldn’t surprise me if Guinness Peat were instrumental in bringing Palmer-Baunack and Somerville to Autologic.

In Guinness Peat the portfolio might have found a friendly bedfellow. It:

…refrains from investing in businesses which it does not understand or those it regards as speculative. This has led it to invest almost exclusively in established companies with a long track record… No significant equity investment is made unless a margin of safety has been identified.

This is value investing-speak for buying companies with good prospects at less than the investment company’s assessment of their value. Good companies at cheap prices, in other words, the raison d’être of the Thrifty 30. As well as restructuring public companies, GPG has been known to take them private, a situation I wouldn’t welcome (unless they paid a lot). Six other institutional investors own 51% of the shares, though, and GPG is promising to return capital to its shareholders, so there is little imminent danger.

So far, Autologic hasn’t justified GPG’s faith, which must, in part at least, be because recession intervened as the company restructured. The coming year is not without its challenges as well. In February the government’s scrappage scheme ended and demand for cars is expected to soften by about 9%. Meanwhile, manufacturers operating with reduced inventories are demanding more timely delivery of their vehicles and some competitors, Autologic supposes, are charging unsustainably low prices.

Nevertheless this is the kind of company I imagined putting into the Thrifty 30. It’s a despised company in a despised sector but it’s surviving. All we need is some warm summers and this cockroach will come back!

GPG and the Naked PE fell victim to the value investors’ curse, buying too early, let’s hope I’m not making the same mistake.

I’ve added Autologic to the Thrifty 30 portfolio at 28p per share, the actual price quoted by a broker.

Vroom

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Printing.com publishes its final results. Management is: “Optimistic of prospects irrespective of conditions improving.”