Victoria: Grinding out the profit

Neither Thrifty, nor Nifty, but cheap at the price

The results are in from the long-term jury [here’s the spreadsheet], and as indicated in the comments on my first post on Victoria the reason for its low market valuation, the shares cost half tangible book value, is profit. The good news is there is some, in every one of the last eleven years.

The bad news is profits are not terribly impressive.

The graphs tell the tale. Victoria has managed a median return on equity since 2001 of 6% (basic, red line) or 7% (adjusted, green line). Currently, profitability is about half the median level.

Breaking down profitability into its constituents, it’s easy to see why:

Net profit margins have more than halved because money is tight, we’re not buying carpets, and simultaneously the price of wool, and oil based fibre for synthetic carpets has gone up. These extraneous factors will probably change, but there’s no getting away from the fact that even before 2008 carpet manufacture was a competitive business.

The exceptional costs of 2005 were related to the closure of Victoria’s Axminster department. Victoria had been making Axminster carpets for 50 years, but competition from cheap foreign imports meant the company was losing money on Axminster and chose instead to focus on Wilton and Tufted carpets, investing heavily in its factories.

Something I didn’t appreciate before investigating Victoria: The names Wilton and Axminster aren’t brands or intellectual property that can be protected. They’re manufacturing processes and the speciality Wilton and cheaper to produce Tufted carpets made by Victoria are made all over the world, by numerous companies. So Victoria has to produce high quality carpets efficiently just to fend off the competition and stay in business.

In such a competitive environment, it’s done well to increase shareholder wealth at a compound annual growth rate of 8%:

And the shares look cheap, even related to profits. Taking the company’s market value of just over £18m, and dividing it by its book value of just under £40m I get a price to book value of less than a half. Divide that into Victoria’s median ROE of 7% and the earnings yield is 15%, implying, but by no means guaranteeing, that an investor buying at today’s price could do very well.

I’m tempted to add Victoria to the Thrifty 30 portfolio, but I’m going to delay because:

1. It’s always a good idea to sleep on major decisions.
2. Victoria doesn’t really fit the Thrifty or Nifty templates. It’s taken tough decisions, the withdrawal from Axminster and more recently its Irish operations, but its not really the kind of bombed-out share I usually run into in the Thrifty category. Neither is it Nifty. I can’t see it ever being highly profitability. Instead it sits between Nifty and Thrifty. A well managed, stable, strong, unpretentious (in the words of UK Value Investor) company in a very tough market grinding out the profit.
3. There’s another carpet company in my Thrifty list. I want to see what I can learn from AIREA before deciding.