Monday, January 31, 2011

DPLM.L - director sales

The following transactions were recently carried out by directors of DPLM.L:

Traded Action Notifier PriceAmountValue
27-Jan-11 Sell Nigel Lingwood 276.00p 20,051 £55,340.76
27-Jan-11 Exercise of option Nigel Lingwood 0.000p 39,316 £0.00
27-Jan-11 Sell I Henderson 276.00p 19,179 £52,934.04
27-Jan-11 Exercise of option I Henderson 0.000p 37,606 £0.00
27-Jan-11 Sell Bruce Thompson 276.00p 31,385 £86,622.60

That's quite discouraging, although it's perhaps a little reassuring that  Lingwood and Henderson are still retaining half their shares.

Sunday, January 30, 2011

TMF: Re: Doughty Dozen, meet the Fallible Fifteen / High Yield - HYP Practical

TMF: Re: Doughty Dozen, meet the Fallible Fifteen / High Yield - HYP Practical

When taking significant amounts of debt into consideration I would do the following:

a) as mentioned above, ensure that debt is no greater than a certain multiple of earnings (I also use 5 times)

b) to ensure that the balance sheet is not window dressed, ensure that interest cover is adequate (say, 4 times)

c) Instead of using return on equity, use return on capital employed i.e. the returns that would be achieved with an unleveraged business. This would be the returns with interest excluded i.e. net operating profit after tax (operating profit x (1 minus tax rate)) divided by shareholders' equity plus debt.

Wednesday, January 19, 2011

DNO.L - Domino Printing Sciences - a weak buy

DNO is a bit unusual for - it's my first "growth" share - i.e. something on a high PE that isn't a cyclical in the dog house. DNO is one of the top 10 holdings of Aegon UK Smaller Companies, which has a five-star rating by Morningstar.

Here's the business activities of DNO:
Domino Printing Sciences plc is a United Kingdom-based company engaged in the research and development, manufacture and sale of industrial printing equipment, controllers and consumables for the printing of variable information. It develops, manufactures and sells a range of products and solutions, which enable manufacturers to code, identify, mark or personalize the products and packaging. The Company’s subsidiaries include Alpha Dot Limited, Domino UK Limited and Domino Printing Sciences QUEST Trustees Limited. On June 22, 2009, the Company completed the acquisition of Labeljet - Comercio e Industria de Etiquetas, S.A. (Labeljet S.A.) and it’s wholly owned subsidiary Marque TDI - Technologias de Codificacao S.A. (Marque TDI S.A). On May 20, 2009, the Company disposed certain assets of Domino (Australia) Pty Ltd to Insignia Pty Ltd. During the fiscal year ended October 31, 2008, the Company completed the acquisition of Alternative Printing Services GmbH. (APS).
 DNO is currently rated a "strong buy" by analysts. EPS growth is expected to be 4% in y/e 31-Oct-2011, and another 9% growth is expected in y/e 2012. It is currently trading on a PER of 17, although this is expected to be 15 for y/e/ 2012 (I think there's going to be more shares in circulation during that period).

It has a z-score of 7.46 - very high. It has negative gearing (-28%). It has positive net current assets, and non-current liabilities of 12.9m - amply covered by net profit of 37.1m for y/e 2010. For y/e 2010, it has a ROE of 22.9%. During the last decade, its maximum ROE was 22.9%, its minimum ROE was 14.5%, and the median was 16.8%.

Some highlights from their preliminary statement for the year ended 31-Oct-2010:
Record sales and our 32nd consecutive year of revenue growth ... Investment in Research and Development increased by 36 per cent ... I am delighted to report that Domino has again achieved record results in terms of sales, profit and cash generation. ... Whilst economic concerns do remain in Europe, our strength in the fastest growing regions of the world, China, India, South America and Eastern Europe, gives us confidence as we enter 2011. ... The combination of an exciting range of new products and additional investment in selling and marketing, together with a strong balance sheet, gives us confidence in the future.

DNO is ranked 40 in a list of 377 companies over £300m by Greenblatt ranking, putting it in the 10th percentile.

I bought in today at a price of 652.2p (inc. dealing charges), and the Footsie stood at 6030. DNO has a mkt cap of 713m.

DPLM.L - a buy

DPLM.L (Diploma) is engaged in the following activities:
Diploma PLC is engaged in the supply of specialized technical products and services. The Company operates in three business segments: Life Sciences, Seals and Controls. The Life Sciences sector businesses supply a range of consumables, instrumentation and related services to the healthcare and environmental industries. The Seals sector businesses supply a range of hydraulic seals, gaskets, cylinders, components and kits used in heavy mobile machinery and specialized industrial equipment. The Controls sector businesses supply specialized wiring, connectors, fasteners and control devices used in a range of technically demanding applications. The healthcare businesses are managed through Diploma Canada Healthcare Inc (DCHI). On January 12, 2010, it acquired 8.2% interest in Somagen Diagnostics Inc. On July 30, 2010, it acquired 80% of Big Green Surgical Company Pty Limited. On September 8, 2010, it acquired All Seals Inc. In December 2010, the Company acquired Carsen Medical Inc.

During 2010, it had an ROA of 9.6%.  Its current ROE is 15.7%, and its median ROE over the last decade is 14.9%. Its minimum was 12.8% and maximum was 17.3%. So, it has been earning consistently good ROEs. It is currently a top 10 holding of (BNY Mellon) Newton Smaller Companies, rated 4 stars by MorningStar.

I bought into DPLM at 307.5p today (inc. transaction costs), when the Footsie was at 6030. DPLM has a PER of about 15. EPS is expected to rise by 15% for y/e 30-Sep-2011, and another 8% in y/e 2012. Overall, analysts rate it a "buy", although on 12-Jan-2011 Numis Securitas downgraded it to "Add".

Some highlights from an interim management statement on 12-Jan-2011
The continuing strength in revenues and operating margins, together with contributions from recent acquisitions, provides confidence that the Group should achieve good progress in 2011. 
DPLM has a mkt cap of £340m, PBV of 2.5, Graham Gearing of 67%, ROC of 89%, and GEY of 10.8% (Greenblatt Earnings Yield).  It has a z-score of 6.10, and negative gearing. It has positive net current assets. Non-current liabilities amount to 10m, and it net profit for y/e 2010 was 21m. So it has an excellent balance sheet. DPLM is ranked 18 in a list of 377 companies over £300m by Greenblatt ranking, putting it in the 5th percentile.

BWY.L - a weak sell

I decided to sell my BWY shares today on the back of an RNS statement. Although BWY looks cheap on a PTB basis, two directors sold some shares. The shares, totalling 33.4k, were options granted under the employee share option scheme. They passed to the directors, who immediately sold them at 679.5p. That amounts to about £227k. I figure that if the shares were truly undervalued, the directors would have kept them. Two other factors influenced my decision. None of my respected fund managers hold shares in housebuilders, and I'm rather worried about the economy and what could happen to share prices.

I say it is a weak sell because PBV is on the historic low side, and housebuilders have had some encouraging results lately. On the theory that things seems to be picking up, shares should be a hold. Profit forecasts are also positive, so it doesn't look a terrible share.

However, I still sold due to my nervousness about economic outlook (which is admittedly rather fanciful), and the directors selling. Maybe the directors felt that they had enough shares in the company, but like I say, how comes we aren't seeing holdings by fund managers, and how comes the directors aren't holding onto their shares if the theory that we could see further significant pickup in housing?

I'm adopting a more cautious strategy now. I've chosen so many rubbish shares in the past, that I need to focus more on downside risk.

Here's my dealing history with BWY:

Om 18-Jun-2010, I bought shares at 628p. The footsie was at 5253. I sold them today at 663p, when the Footsie was at 6030. That gives me a gain on BWY of 5.6%, versus a return by the Footsie of 14.8%. Dealing costs are included in my buy and sell prices, but not dividends - which would have been quite small.

Update: according to this graph,  the first time average house price to earnings ratio is about 4.5, compared to the long-term average of 3.5. First-timers therefore find houses very expensive. It is interesting that BWY recently said that it was building more expensive houses, where, IIRC, they were more affordable. This is interesting, because it appears that a two-tier system is developing. OTOH, according to another graph, average house prices adjusted for inflation appear to be below trend, indicating that houses are relatively cheap (actually about in line). This is counter-intuitive when you consider that interest rates are low. Maybe it is the lack of lending that is the real problem, rather interest rates per se. However, if rates are low, then affordability should also be good for first-timers. So there's a piece of the puzzle that I'm not understanding.

Update 03-Feb-2011: BWY is currently trading at 603p, so it looks like I was right to sell.

Tuesday, January 18, 2011

TD Waterhouse - Top 10 buys and sells

I took the top 10 buys and sells of clients at TD Waterhouse. I thought it would make interesting reading 6 months down the line to see how good or bad investors were.
11 January 11

Top Ten Buys and Sells - Weekly Retail Investor Activity Summary and Comment

The Top Ten buys and sells are measured as the total number of trades carried out in each stock by TD Waterhouse clients over the previous 7 days.
This report is not a recommendation to buy or sell these stocks.
  Top Ten Buys Top Ten Sells
Darren Hepworth, Trading and Customer Services Director, TD Waterhouse comments:
“This week our customer buys surged by nearly 20% on last week’s as the FTSE 100 closed at 6014 points (on 11 January), buoyed by optimistic comments from brokers on the banking sector and the expected government retreat in its battle against big bonuses.
“The sound bites provided a catalyst for a series of rises in share prices with Lloyds Banking Group (LLOY) jumping over Royal Bank of Scotland (RBS) into second place on the buys from last week’s sixth position. In addition, Barclays’ (BARC) share price reacted positively to Bob Diamond’s comments at his meeting with the Treasury Select Committee, that it is not acceptable for tax payers to bail out banks.
Tempted by technology
“TD Waterhouse customers continued to hone in on banks, energy and miners, with these sectors accounting for more than 85% of the total top ten trades over the last seven days (ending 11 January). However, two exceptions to the rule appeared in the top ten buys this week as ARM Holdings (ARM) turned in the best performance on the FTSE 100, with its share price increasing 6% to 407.5p, following analyst remarks in the US that the company is a bid target.  Meanwhile, Aviva (AV) entered the buys in eighth place amid reports it is in talks with Norwich & Peterborough (N&P) Building Society to buy N&P’s advisory business.
Investors remain energised
“Our customer trading volumes in BP (BP) saw the company move up to second place in the sells and return to first place in the buys table, replacing Desire Petroleum (DES) at the top as oil explorers remained popular with our clients.
“New entry to the top ten tables this week, Range Resources (RRL), announced that it had snapped up a large stake in the East Texas Cotton Valley project increasing its interest to 21.75% this week while Xcite Energy (XEL) slipped in both the sells and buys tables on the back of news of its application for the admission to AIM of 100,000 new ordinary shares.”

Monday, January 17, 2011

VOD.L - VODAFONE - a weak buy

VOD is trading on a PER of 11, and a yield of 5.1%. It is liked by M&G Recovery, Fidelity Special Situations and Invesco Perpetual Income. At a PBV of 0.99, it is in the lowest quintile - a favourite value criterion. It has a z-score of 0.52 (ouch), but has steady streams of revenue. There are decreasing EPS projections, though. VOD has been making substantial buybacks lately.

Saturday, January 15, 2011

Interest rates don't predict house price movements

Standard market lore dictates that low interest rates create high house prices because it means that mortgages are cheaper, so borrowers can afford to pay more for houses.

I've been reading "The Only Three Questions That Count" by Ken Fisher. His first question is "what is it you believe that is actually false?" We should question our beliefs, and see how they stack up against the evidence.

I thought I'd do that for house prices over the last decade. 2000-2009 was probably an extraordinary decade for house prices, given relatively low interest rates for the UK. I used the following source:
* Interest Rate History - for interest rates (duh!)
* JRF Housing and Neighbourhoods Monitor - for house prices

Using those two sources, I compiled the following table:
      IR  HP
2000 5.9 101
2001 5.1 112
2002 4.0 128
2003 3.7 155
2004 4.4 180
2005 4.5 190
2006 4.9 204
2007 5.5 223
2008 4.2 227
2009 1.0 226

IR - average interest rate (%)
HP - house prices (£000s)

For the whole period, 2000-2009, HPs (house prices) rose an average 9.4% pa. During the decade, there were two periods of sustained rate reductions (2000-2003, 2007-2009) and one period of sustained rises (2003-2007).

In the period of generally rising rates (2003-2007), where interest rates rose from 3.7% in 2003 to 5.5% in 2007, house prices rose 43%, equivalent of 9.5% pa - slightly above the average rate. Right there, we see that increasing rates does not imply poor results for housing.

In the period 2000-2003 when rates fell, house prices were up 53%; an annual rise of about 15.3%. This provides confirming evidence for our original hypothesis. It's not all plain sailing, though. If you look at 2008-2009, there was a precipitous drop in interest rates, but it the only period in which house prices actually fell.

The conclusion is that interest rates do not predict house price movements, despite what common sense dictates.

Wednesday, January 12, 2011

GAW.L - analyst downgrades

According to this article :

Tabletop games specialist Games Workshop has unveiled a trading update in which the company warns that results for the year to May 2011 will be ‘below current market expectations.’ The shares lost 12% following the announcement, falling 50p to 372.5p.

The Nottingham-headquartered company said that sales for the first half to 28 November were down 4%, adding that ‘difficult trading conditions’ since then mean that this shortfall is ‘unlikely’ to be recovered by the year-end. In addition it warns that royalties receivable in the current year are ‘not as significant as in the year to May 2010.’

Following the update, house broker Peel Hunt slashed its forecasts, reducing its profit expectations from £17 million to £12 million in 2011, and from £18 million to £15 million in 2012. In addition it has downgraded its EPS forecasts 29.5% for 2011, from 37.6p to 26.5p and from 40.5p to 33.7p for the following year.

Recommended by Growth Company Investor last August at 420p, the failure to reach forecasts is a cause for concern, however we would advise waiting until interim results due on 25 January for further clarification on the outlook.

It looks like my estimate of 30p in perpetuity is still valid, so I think things are not as bad as they look.

GRG.L - a followup

I did some more analysis of GRG over on the Motley Fool site. As you can see, I am still quite bullish on it. Shares are up over 2.5% today on favourable trading statement.

Tuesday, January 11, 2011

GAW.L - another look

I saw an interesting discussion about GAW, and I responded with the following observation:

Good post. I recently bought GAW, BEFORE the profit warning. So I'm obviously not a happy bunny. Maybe I'm just rationalising, but I'm not sure GAW is such a bad investment.

Consider this. Forecasts for 2011 are 32.29p per share. 2012 are a little up on this. Let's do a fudge-factor and say that, in light of recently news, GAW can earn 30p in perpetuity in real terms; assuming it doesn't expand, and just sticks to its knitting. At a share price of 342p, that gives it an earnings yield at 8.7% - better than deposit accounts, that's for sure.

We might want to add inflation on top of that. The CPI is 3.3% pa, and the RPI is 4.7%. Let's split the difference, and say that inflation is 4%.

The combined return is therefore 12.7% (8.7+4) - which seems OK.

Sunday, January 9, 2011


According to Google finance: "Unilever plc is one of the parent companies of the Unilever group (Unilever), which is a supplier of consumer goods. It focuses on everyday consumer needs for nutrition, hygiene and personal care. Unilever’s portfolio includes brands, as Knorr, Lipton, Hellmann’s, Magnum, Omo, Dove, Lux and Axe/Lynx. The Company’s products are sold in over 170 countries around the world. It operates under four categories: savoury, dressings and spreads; ice cream and beverages; personal care; and home care. In April 2009, the Company completed the acquisition of the TIGI Hair Care Product Business and Advanced Education Academies. In July 2009, the Company acquired the sauces business of Baltimor Holding ZAO. In December 2010, the Company acquired Sara Lee Corporation's Sara Lee Personal Care and European Laundry business. "

It surfaced as one of Greenblatt's Magic Formula stocks (7th on the list of companies over 300m). Here's some stats:
mkt cap: £24.5b
sp: 1906p
ROC: 66%
GEY: 15% (Greenblatt Earnings Yield)
PER: 15.94
EPS growth yr 1: 7.6%
EPS growth yr 2: 10.4%

Also, according to Google, it has ROA for 2009 of 10.0%, and 13.04% in Q3 2010.

It is also in the top-ten list of holdings of Cazenove UK Growth & Income, and M&G Recovery. Both of these funds are rated 5 stars by BestInvest.

Which Asian Trust?

What with all the fuss over Asia as the place to invest, I thought I'd try to pick out the best of the batch that could be purchased through TD Waterhouse. I used the screening supplied by the FT ( BestInvest seemed like quite a good source of info, too.

The FT returned 19 results for Asia Pacific including Japan. Here are some of the best-rated ones:

                                  L  B  M  S
1 Aberdeen Asia Pacific & Japan   5  5  5  -
2 First State Asia Pacific        5  2  -  -
3 Invesco Perpetual Pacific       5  3  5  AA
4 St james Place UT Far East      5  -  5  -
The columns on the right represent the ratings by various agencies:
L Lipper
B BestInvest
M MorningStar

Trusts 2 and 4 are not avaialbe through TD Waterhouse, so the story ends there for them. Taking a look at the remaining trusts:

1 (Aberdeen) It is a large-cap blend (i.e. value and growth) fund. It invests in Australia, too. Per BestInvest: "strong balance sheets. bottom up approach is the main driver of country and sector weightings. This fund structure is not benchmark driven"

3 (Invesco): It is a large-cap value fund. It is aimed at captial growth, and includes Australasia and Japan. It initially focuses on macro trends.

Q: Which one would I choose?
A: The Aberdeen one - because I like the bottom-up non-benchmark style rather than macro trends.

GAW.L - GAMES WORKSHOP - a valuation

Recently, the directors reported "pre-tax profits in repsect of the year end 25 may 2001 are unlikely to meet current market consensus estimates".

Consequently, my shares too a dive. Grrr. Let's ask ourselves the question: are we getting an acceptable return on our money?

If I perform a log-least squares fit for the EPS for the last decade on GAW, including analysts forecasts, I obtain an R2 of 0.0% and a median of 29p. The R2 (R-squared) of 0 is pretty impressive: it means that there's no correlation between EPS valus and time. So let me apply a cyclic model, and assume that in future GAW will earn a return of 29p pa. Applying a "fair" multiple of 10 gives gives a target price of 290p, which is below the price of 372.5p that I I saw in a recent quote. If I appy a multiple of 13 (but why should I?), I get a value of 377p, suggesting that GAW is fairly valued at this level.

So GAW looks like it's overvalued at this level.

Applying a Greenblatt Earnings Yield idea, the median operating profit of GAW over the last 10 years is 12.35m. I assume that this is about EBIT. For EV: using a market price of 372.5p, GAW has 31.2m shares in issue, giving it a market cap of 116.2m. Its net debit is 3.4m (2.0 long term liabs + 18.4 current liabs - 17.0 cash) . So its EV is 119.6m (116.2+3.4) giving it an GEY of 10%. That kind of return is acceptable.

It would be interesting to see how much further GAW drops (on 5 jan 2011 its price went to 353p), and whether I have the guts to buy more.

Friday, January 7, 2011


Projections for RWD don't look good. I'd thought I run a valuation over RWD like I did for Greggs. Using actual data for the decade to end 2010, I obtain:
growth rate: 11.6%
R^2: 91%

If I include analyst forecasts into the mix, (which show 2011 and 2012 declines in profits), I obtain:
growth rate: 8.5%
R^2: 77%

Suppose I use the more pessimistic figure of 8.5%. RWD currently has a yield of 5.2%. Adding the two gives an expected return of 13.7%. That's pretty good.

GRG.L - GREGGS - A valuation

I have started to read "Financial Statement Analysis and Security Valuation" by Stephen Penman, and it is getting my juices going as to how to approach company valuation.

One model I have been thinking of is for defensive companies. My idea is that one can calculate the "return" on a company as the long-term growth rate + dividend yield. I think a test for a company's "defensiveness" is its R^2 of its EPS. With this in mind, let's look at Greggs, the retail baker.

It's EPS record looks like this:

Here's some stats produced by my Racket program:
intercept 17.55602420134553
r2 0.9330784514701992
rate 1.0813386071023623
terminal 35.48800217270219

EPS for 2009 actual is 34.1p. My program suggests it "should" be 35.5p. This is pretty good, and I don't think we need to read too much into it. I think it can be used to point out if a reported EPS is likely to be too low, or too high.

What's interesting here is that GRG has an R2 of 93.3% - in other words, the model I use is very explanatory of the EPS values seen. Maybe uncannily so. It's a useful number to look at, because it tends to confirm that we are, indeed, looking at a defensive company. This gives us some confidence that our growth rate is meaningful. In our case, the growth rate in EPS is 8.1% pa. A word of warning: EPS figures can be influenced by how capital is being expended. My model doesn't account for that. Never mind. GRG has a fantastic balance sheet, so I am going to take my growth rate of 8.1% pa as "good".

Now onto the dividend. GRG is currently trading at 450p, and its dividend yield is 3.9%.

So our expected return for this share is 12.0% (=8.1+3.9). That's a pretty good return - although not Buffett-like.

Saturday, January 1, 2011

BARC.L - BARCLAYS - still a good buy

Ah, Barclays banks, getting better and better, all the way down to zero. Here's why I still like it, though. At a current share price of 261p, it has a market captial of £31.8b. According to this article,
According to the note, Barclays will have a tier one ratio, a measure core liquid assets, of of 8.7% by 2012. If the "UK finish" is a 10% core tier one, Barclays would be £7bn short of capital.

Let's assume that is true, and wipe £7b off of Barclays to see if it is still a buy.

Its current PBV is 0.64. At a market cap of £31.8b, this gives it a BV of £49.7b (=31.8/0.64). On a worst case so far, the current holders will be diluted to a PBV of 0.78 (= (31.8+7)/49.7). That's obviously a hefty dilution. Now, the median PBV of BARC orver the last 5 years is 1.63 (which, remember, includes some pretty drastic years). Over 10 years, it is 1.93. So, even on a bad turn of events, if BARC was to return to just the median PBV of the last 5 years, we'd expect a fair value over price to be 1.63/0.78 = 2.1. So, we could still see a doubling of the price if BARC returned to a normal valuation, even if we are pessimistic about the dilution.