Monday, April 18, 2011

PIC.L - Pace - crazy price

Perennial investor disappointer Pace saw its share price fall a further 1.48% today, although the Footsie itself was down a little over 2%. PIC qualifies as a "Magic Formula" company.

According to Google Finance:
Pace plc, formerly Pace Micro Technology plc, is a United Kingdom-based developer of digital television technologies for the pay television industry. The Company's principal activities are the development, design and distribution of digital receivers and receiver decoders for the reception of digital television and the reception/transmission of interactive services, telephony and high-speed data.

Analysts expect mid-double digit EPS growth over the next two years. In a report on 8 March for y/e 31 Dec, directors reported adjusted EPS up 24%, improved return on sales, revenues up by 17%, and the completion of three strategically import acquisitions. The board expects similar levels of revenue growth in 2011, and improved returns on sales. "Overall, the Board is confident that Pace has created an excellent platform for growth as its customers continue to lead the global evolution of managed digital services into and around the home."

Sounds pretty good, right? So why is PIC trading on a PER of only 6? Well, the company delivered two bombshells that caused the share price to plummet after it issued its report. The first thing the market didn't like was a one-off exceptional cost of £19m from "transaction related expenses, acquisition integration costs and restructuring to implement post-acquisition operating structure". Consensus seems to be that the board landed that one as a bit of a surprise. The second one, which isn't in the report, but was mentioned during the presentation, was that a customer decided to forgo plans to upgrade, in favour of switching to Pace's next-generation technology in 2012. It appears that this will not affect analyst forecasts.

PIC is a growth company, but it does operate in a competitive business. So, whilst growth is expected, there is clearly some risk with this company. At a PER of 6, it appears that the market is way over-pricing the risk involved. News flow through this and the last year has actually been quite positive, with new deals in India in the offing, which could be huge, new deals in Brazil, and a favourable court ruling on the tax status of its set-top boxes. All the favourable points have been completely overshadowed by the events I have mentioned above.

Potential investors will have to take a view on this one: weighing up the quite positive growth prospects against the risks. Maybe Pace will be out-competed, but that doesn't seem to be the main problem here. If you believe that the company has been unfairly hammered by negative sentiment, then now is a golden opportunity to load up. Not a company to bet the farm on, but the upside seems very favourable compared to the risks and the share price.

1 comment:

John said...

PACE comes top of my initial screen for good cheap companies. What's put me off so far is the lumpy sales and earnings over the last decade and the lack of a consistent dividend. However, they have grown a lot and things look more stable in the last 4 or 5 years, so perhaps I'll have a proper look and see what my crystal ball says.