Victoria weathers disaster and depression

The value is tangible, not so sure about earning power

Victoria makes and distributes carpets under the Victoria Carpets brand and others. Its biggest market is Australasia, which may have saved it from the worst of the recession, followed by the UK. It also sells carpets through an associate company in Canada, and although it is closing its Irish operation due to a catastrophic decline in demand there, it will continue to sell carpets through agents who are former employees.

Rather ghoulishly, the floods that turned Queensland into a disaster zone last December, and the earthquake that devastated Christchurch in February are likely to be good for business once rebuilding commences and insurance claims are settled, although the local economies are currently depressed, as is the UK generally. The rising cost of wool and synthetic (oil-based) fibre has combined with our reluctance to buy carpets to scupper profit margins.

[Data Source, 2011 annual report, here’s the spreadsheet]

Victoria’s F_Score of seven out of nine indicates it’s getting stronger, though, and a trading update last month confirmed the trend has continued beyond the end of the year, particularly in the UK, where it has successfully increased prices and entered a new market supplying the UK’s leading insurance replacement specialist.

The two F_Score fails are marginal. Its current ratio, or ability to meet short-term obligations (current liabilities) out of currents assets has deteriorated fractionally and so has its gross profit margin, but in round numbers they’re stable.

Otherwise the company is less indebted and more profitable than it was last year.

In absolute terms, though, Victoria is still finding business conditions tough. Return on Assets is a pitiful 2% so the shares are going to have to be very cheap or I’m going to have to be confident profitability will improve, probably both, to add the company to the Thrifty 30 portfolio.

It certainly looks cheap. At 265p the market values Victoria at just under £18.5m, half its tangible book value, mostly property, machinery and stock valued at £39.5m in the accounts last April.

Victoria expects the UK market to remain subdued for at least two more years, and it’s trying to increase market share in all territories and reduce its dependence on independent retailers by selling a wider variety of high quality but good value carpets (and carpet tiles) to commercial customers and by cultivating a higher profile with its new range in John Lewis department stores.

The value of its factories and stock is tangible enough, but the profits the company might earn from it need a little more scrutiny. There’s no doubt Victoria is a resilient company, I’m just not sure its profitable enough.

An investigation into Victoria’s earnings over the past decade should help.