Diary: Pace - purchasing head to have direct line to CEO

Supply Management reported yesterday:

Set-top box manufacturer Pace has appointed a new purchasing director who will start at the end of the month. The new buying director, who starts on 23 January, will be responsible for the procurement function and report directly to new chief executive officer Mike Pulli. The shake up follows a challenging year for Pace, which saw it experience severe supply chain disruption problems following the tsunami in Japan and floods in Thailand. Pace chairman Allan Leighton said in a statement: "The new senior structure gives the CEO direct line of sight to the critical areas of the business."

Dare I say it, but it looks like Allan Leighton might actually sort this company out. On a PER of 4.3, PBV of 0.98, I'm hoping  that confidence will slowly return.

Diary: PIC

I see Pace was mentioned in The Guardian today as a share tip for 2012 by Rupert Neate, whoever he is:

After four profits warnings in a year, surely things cannot get much worse for Pace, 71.5p. On the plus side the company's disastrous year allows you to pick up the stock at less than half the price it was this time last year. Back then the Yorkshire-based set-top box maker was a stock market darling, and most of its underlying potential is still there (albeit a little more underlying). Pace makes set-top boxes for most of the world's biggest satellite and digital TV providers, including BT and Virgin Media. As TVs get cleverer (think HD, 3D etc) Pace can charge more for its boxes, and it has plans to help integrate TVs and other household items with the internet. Also history shows that consumer spending on pay-TV subscriptions actually increases in difficult times, so if Eurogeddon does happen Pace should be better placed than most as people would rather forgo nights out on the town than access to the Premier League or the latest movies. The analysts seem to have faith in new boss Mike Pulli, who, as president of Pace America ,expanded its US customer base.

As ever, journalists have a way of putting things more concisely than I ever seem to be able to manage. Gotta love the phrase "albeit a little more underlying". I hear that one!

Diary: enq, pic

ENQ - Enquest - Oil and Gas producers - 91p/£730.1m

BTW, whenever I quote a price in a headline, it's usually at yesterday's price - I pull it off of Sharelock Holmes. This will help explain some inconsistencies in the prices I report.

ENQ is one of my forays into growth investing. I bought in late August at 109.6p (including all costs). Shares are up 11% today to 102.5p on a great announcement:

EnQuest sanctions the development of Alma and Galia. Production guidance shows growth potential of over 20% p.a. Alma/Galia:: Medium term production guidance: CAGR of over 20% per annum, 2009 to 2014. Crathes exploration: exploration well, 21/13a-5 encountered a 52ft light oil column in excellent quality Palaeocene sands.

Here's what a poster on LSE (that's London South East, remember, not London Stock Exchange. I've never had much joy at the latter's site) said about ENQ:

To those who have only recently come across Enquest let me tell you some facts. The CEO of this companyAmjad Bseisu is perhaps the smartest guy in business today. Not just the oil business but any business. He is a very very sharp, polished smooth operator. As smart business men generally do he has already made a LOT of money. When he joined Petrofac he was considering the idea of setting up his own hedge fund specialising in oily type deals. Enquest has given him the option to do this in a practical way with real fields and bits of kit but be assured they are merely the means to an end which is making much more money for himself and his shareholders. Look at the investment he has made with his own money in the company he is running! Why do you think he is doing that? Because he can't think of anywhere that he can make more money! Enquest will continue to put together innovative value enhancing deals for years to come. I admit I know the guy well and as a result have approx a quarter of my SIPP invested in Enquest at prices up to !35 but I'm relaxed as presumably Amjad is who also bought more shares at a much higher price than they are today. Long term this is a highly professional steady business that will make money for years to come. It's not a Wessex or a Chariot but as safe core high quality holdings go they don't come much better than Enquest.

OK, a bit rampy that one. There's not much other good stuff on the BBSs.

I'm pretty happy with this one so far. Directors do have an enormous stake in it. Bseisu has £68.7m, Hares has £3.5m, and the others total about £1m.

Shares are trading on a PER of 15.3, so as oilies go, they aint cheap. RDSB is on 9.3, and poor old BP. is on 6.6. ENQ has net cash of £149.2m, negative gearing, but a low z-score of 1.59 (although that seems to be normal for oilies). ROE is currently 8.4%.

The future is of course imponderable, but I'm pretty happy holding this one.


PIC - Pace - Tech hardware and equip - 45.3p/£138.3m

A quick glance at analyst forecast show that they're getting increasingly bearish since the last time I looked. I'm getting EPS figures of 2011F 18.87p -16.5% 2012F 17.77p -5.8%. I still hold this share, what little left their is to hold, that is.

As ever, the basic reasoning behind holding is that the problems are only temporary. And it isn't all bad news. Here's an article that appeared today, for example:

Norwegian triple-play provider sees 35 per cent service user growth with launch of Pace Elements-powered VoD (Video on Demand) portal. The new portal provides Altibox subscribers with a simple, highly intuitive experience when searching and navigating its on-demand film and TV content.

PIC is doing some very neat things, they've just been finding lately that water and electricity make poor bedfellows (yeah, laugh it up, us PIC shareholders need a sense of humour). It's trading at a PER of 2.4. Ugly indeed.

I've taken some snippets from the ADVFN BBS - a site that I'm growing to tolerate despite the jiggling baloney and dreadful layout. Here's some very recent opinions, which pretty much capture the sentiment of the market:

You see, you read news like that and I just think wow.... This company is going places. If the software side comes off big time this could be a massive growth company. Such a shame regarding the disasters this year.

and

Terrific news HOWEVER, and as so often there’s no £-$ attached to that news! Are we charity?  Had the potential numbers to this been significant they’d be obliged to say so. The market will likely just react with ‘oh very good’ NEXT! IMHO bla bla

and

I just don`t see the long term Case for Pace . I`m no Tech` expert , but , often these `Tech Superior` company`s are overtaken by `New Tech` . I don`t rate their Global Reach anymore in the hands of these Directors , I have no confidence that they will be able to exploit it , in fact it may well be another cash gobbling distracting disaster in the making . Both the above require funding as well as expertise , and even the funding via cash generation looks wobbly . So , the three reasons I originally made the mistake of buying here , now look to be highly suspect and unattractive . I got it all wrong , but I am also holding a small residual stake in the hope of a takeover .

and

Even if business declines to the point they earn only £50m profits they will still be worth £2 a share when debt free in two years time. Personally I think they can hold £100m profts year on year as a absolute min, I'm not convinced £200m will be achieved according to strategic review.

Diary: tcg, gmg, icp, pic, opts

TCG - Thomas Cook Group

Thomas Cook down 72% today as of writing on fears of its finances. Readers may recall that I tipped this as "one to avoid" for 2011. Unusually for me, I have been remarkably spot-on for this share. It has fallen 93% YTD, vastly under-performing the market. I am, of course, chuffed to bits at having made a good call.

I can't help thinking that there's actually a viable business tucked in there, if not for the debts. Maybe they'll be a debt-for-equity swap, wiping out current shareholders. I wouldn't say that's a prediction, though, that would be too bold an assertion. I prefer the Delphic Oracle approach - where there's sufficient ambiguity in what I say to be proved right whatever the outcome.

My verdict on this badboy is: avoid. I couldn't rule out a dead cat bounce, of course. No-one can do that. Except for those that can.

A poster on today's Motley Fool article on TCG pretty much sums it up in a nutshell:

This company has large borrowings and negative net tangible assets. It is in a highly recession-prone industry and also vulnerable to international unrest. IMHO it will not survive.

GMG - Game Group

Beleagured retailer GMG drops another 15% today. I can't imagine there's too much doubt that we're in the end-game (no pun intended) on this badboy, and now we're just waiting for the inevitable. It's an interesting share, because there's a poster who I highly respect who bought in on this not that long ago. The theory was that it was a cigar butt that was so cheap that there was a statistical likelihood that a more normal valuation will prevail at some point in the future. It's sliding downhill fast, mind, so that looks like an increasing struggle.

ICP - Intermediate Capital

ICP up nearly 10% today. I own this pup, so that's the kind of thing I like to see. It's on a PER of 6.9, PBV of 0.6. The company announced its results for 6 m/e 30-Sep-2011:

As the majority of traditional lenders continue to retrench from the credit market, we also see considerable opportunities emerging to acquire debt at attractive discounts in a distressed market, to provide finance to existing buyouts to restructure their overgeared balance sheet and to offer reliable financing solutions for new transactions, thereby delivering high returns to our institutional investors. The progress made on fundraising in a difficult environment is also a testament to our fund management franchise

I wont bore you with the numbers they reported, they look OK, nothing noteworthy. I have to admit I'm a little perplexed as to work out why the market upped the shares 10%. The results seemed fairly predictable to me. This kinda reminds me of what I saw with RWD earlier this year - shares marked up strongly on results that contained no surprises.

My investment "thesis" (not sure I like that term) is that the stock is cheap, the management have outlined where they believe growth will come from, and I believe them. So, a pretty simple idea: cheap, with bags of upside.

PIC - Pace

PIC is having a bit of a rebound the last couple of days. Given how far it's dropped, it's probably about time, too. Couple of points from the FT:

Exane forecast Pace’s problems to erode its cash pile to just $35m by the end of the year, though it said concerns over the balance sheet were misplaced. “We believe Pace should be able to accommodate any bump in the road by factoring part of its circa $400m of receivables,” it said. Separately, Pace was facing relegation to the small-caps in next month’s FTSE review.

 I can resist including the following quip from some wag on the bulletin boards:

I can´t see how this stock will correlate with the wider market from the point is has reached. More likely an Asian weather index!

 Amen to that!


OPTS - Optos - Healthcare equip and services - 225.8p/£161m

Shares up 0.6% on finals. Looking pretty good. Revenues up 35%, profit after tac up 63%, and generally all OK, except that they have increased net debt, and cash flow from operating activities is down.

PER is 11.3, ROE is 23%, gearing is 25%, z score 3.71, so there's nowt to dislike there. EV/EBITDA is 5.3, so you're definitely not overpaying.

OPTS is looking like a pretty interesting GARP idea, admittedly a bit riskier than average, and analysts do expect a 12% dip in earnings for 2012.

Other notes:

• unveiling Daytona, the next generation desktop retinal device, in 2012Q1
• Optos' core devices produce ultra widefield, high resolution digital images (optomaps) of approx. 82% of the retina, something no other device is capable of doing in any one image
• potential to offer opthamologists and optometrists the most powerful tools for disease diagnosis and management.
• expanded salesforce
• moving into new territories in Europe and Australi
• newly launched device 200Tx addresses important export markets such as Japan

I don't own any shares in OPTS, but I must admit it's giving me the warm fuzzies. I can see it as part of a smaller-cap riskier but high-growth potential share.

Diary: aly, dplm, fccn, grg, jd., mrw, pic, rtn, rwd

I see that the market's taking a tumble today. Down 2.02% as I speak.

DPLM - Diploma - Support Services - 302.5p/£342m

Gratifyingly, DPLM is actually up 2.94% on latest prelim announcement of final results for y/e 30-Sep-2011. All-round excellent news of revenues up 26%, profit for the year up 20%, adjusted earnings per share up 48%. The only negative is FCF down 16%. Revenues up from strong demand and acquisitions, margins up due to cost reductions.

Net cash is down to £12.2m (2010 £30.1m), but there was an acquisition of £28.2m, so I'm happy with that. Full dividend up 33%. Excellent. Good performance across all divisions.

A new phrase that I like from DPLM is "GDP plus":

Diploma's businesses are focused on essential products and services that are generally funded by the customers' operating rather than capital budgets, providing recurring income and stable revenue growth. This resilience gives us confidence in delivering the "GDP plus" levels of underlying organic revenue growth which we aim to achieve over the business cycle.  In addition, by supplying essential solutions, not just products, we are able to sustain attractive margins by delivering real value to our customers and suppliers.  Finally we encourage an entrepreneurial culture which ensures that our businesses are agile and respond quickly in changing economic and market conditions.

Maybe I'll use that to replace the phrase I sometimes use as "steady compounder". 

I have held these shares since the end of Jan 2011, during which time the shares have risen 3%, against a Footsie decline of 13.3%. The company has a ROE of 19%, against a decade median of 15%. As I reported yesterday, the company has been growing its dividends by about 16% pa over the last decade. Yet it trades at a PER of 10.8, and offers a dividend yield of 4.0%. In the directors outlook, they describe the business as resilient, a good geographic spread of activities, a strong balance sheet, and expect further "GDP plus" performance.

Very good buying opportunity, especially at these levels.

I think DPLM, along with BATS, is starting to drive home, very slowly (I seem to be a slow learner), that if you buy decent companies with good balance sheets and reasonable growth prospects at sensible prices, then you'll probably do well. I'm not saying you can't go wrong, but at a PER of 10.8, that looks a pretty sweet deal for DPLM. The problem with "value" shares like the banks, insurance companies, iffy retailers and suchlike, is that they're "all over the place", swaggering around like drunken sailors on shore leave. Those falling knives are very difficult to catch. It's not so much that I "mind" volatility, it's just that it seems to be too easy to be wrong about them. Look at Bruce Berkowitz's Fairholme fund. It's down 31% YTD, compared with +2% for the DJIA. He might ultimately be right on the financials, I think he's a very smart guy, but he has created an enormous headwind for himself.performance-wise.


6 months ago

Time for me to take a trip down memory lane, to see what I was writing about in May.

RWD

I had a look at RWD, which is down 18% over 6 months, compared with Footsie down 12%. That's possibly not especially meaningful, because it is only int the last 2 months that the share has underperformed. So it could just be market noise. I see that on 15-Nov-2011 Numis has downgraded RWD from add to hold. The share price has underperformed the market by 3.6% since that date. That could be a contrarian indicator as much as anything.

It's now on a PER of 9.5, which is by no means stretched. The fly in the ointment is that EPS is expected to decline by 41% in 2012. It has low gearing and a PBV of 1.1, which is very low. ROE of 16% looks respectable, and it's trading on a PFCF of 6.6, which seems almost irresistable. Berkowitz has said that he is looking for a free cash flow yield of at least 10%, and can't kill the company. RWD would appear to meet both of these criteria. It's a bit disappointing to see net debt increase to £28.2m since I last looked at them. It should be said that their balance sheet is still very robust, though.

I said that the prior reduction in operating profits by 30% looked scary, but it should be remembered that y/e Apr 2010 was particularly strong for them. I calculated an EBIT/EV of 13%, which offered an attractive return. Revising for the interims, I get EBIT 30.1m (= 13.7+37.4-21.0), and EV 209.4m (= 187.9+21.5), giving UEY (i.e. EBIT/EV) of 14%. So about the same.

Towards the end of my post on RWD, I said:

 Expectations reflect a lot of negativity surrounding consumer spending and commodity prices. If sentiment improves, then the share price will, hopefully, reflect a shift.

So far, we're still waiting.


DPLM

I also took a look at DPLM, an "old-fashioned British combine dating back to 1931 that's seen more restructurings than Joan River's face". The directors report was confident in their outlook, Interactive investor said "the stock still looks good value and shows long-term potential", and Richard Beddard said " looks like a superior business that will continue to earn high returns". He said other good things, but a bear point for him was that although its products are specialised, most companies succumb to competitive pressure sooner or later. "The odds are against Diploma". He didn't like its price at 2.5X BV and 27X 10-year average earnings.

Greenblatt talked about the issue of competitive pressure some time ago. When someone asked if he was worried about reversion to the mean, he replied that he thought there was a distinction between reversion to the mean, and towards the mean. So, I think the point is that long term we're all dead, but that doesn't necessarily mean we'll be dead tomorrow.

I noted one investor write about the company:

I watch some shares go up and down like West Ham but not this one. Just lie back and smell the Roses.

How right he was!

My ultimate verdict on DPLM was:

Given current valuation levels, the market seems to have recognised the merits of the company, so I wouldn't expect a short-term pop out of it. However, I would expect a portfolio of say a dozen such companies of similar quality at similar valuations to give investors a satisfactory performance.

Indeed, the shares haven't dazzled me with their performance (although they are beating the market by 20% YTD, so I guess I must be fussy ;) ),  but I believe that DPLM is now at a very attractive valuation. The whole thing about a dozen such companies looks completely on-the-money, in retrospect. Well, I had to get something right, didn't I?

Retailers

Ah yes, good ol' retailers. Haven't they had a rocky ride lately?! I took a look at FCCN (French Connection) and JD. (JD Sports). Rental lease obligations are generally off-balance sheet, tending to make retailers look better than they are. I gave a whole spiel about trying to adjust for them.

In my original post, I noted that there was heavy negative sentiment surrounding retailers. During the 6 month period, JD lost slightly less than the market (-8.7%, compared with FTSE -11.7%). FCCN is down 32.1%, an unmitigated disaster.

I said that I expected the company to be bigger in 5 years time than it is now, although short term outlook is for a decline in EPS for 2011. Despite all the doom and gloom, and for all the ostensible wobbliness that you associate with retailers, JD. has been an exceptionally steady company. I had the feeling that the market was not quite "getting" what JD. was about, so I continue to have some confidence in the future of JD..

Contrast that with FCCN. It had had a cracking share price performance at the time - up 20% YTD, but has since come down to earth in a big way. I wrote recently that it was approaching net-net territory, but that didn't necessarily make it touchable. Its operating margins are wafer thin, and it occasionally has to dip into its surpluses, thereby diminishing its NCAV. I view FCCN as a risky turnaround, with a healthy but diminishing supply of fat to live off. If it can pull off a reversal of fortunes, this will probably become a spectacular share. The problem is: will it? FCCN's latest trading statement didn't make for pleasant reading, hence the slump in share price.

Another company that I mentioned was ALY (Laura Ashley). It showed record profit in y/e 29 Jan 201, but did note a decline in performance since the report. In the 6 month period, ALY has had a similar performance to JD..

Defensives

I took a look at 3 defensive companies: GRG (Greggs), MRW (Morrisons) and RTN (Restaurant Group). It's a bit debatable whether one could call RTN a defensive. I think "quality compounder" what be a better description. It clearly wont have the resilience of Morrisons the supermarket.

Over the 6 months period, all three shares have held up better than the Footise, a fact that should surprise no-one. FTSE is down 11.6%, RTN -2.8%, MRW + 0.4%, GRG -6.6%. I recently highlighted RTN as a company that has been growing its dividends by nearly 11% for the last decade.

PIC

Ah, PIC. I took a look at this, and noted:

 Pace is infamous for being a "serial disappointer", and this year it has seen it perform a veritable tour de force on that score.

And my, its catalogue of woes just keeps getting bigger.  Since then, we've had floodings in Thialand, which have created supply problems of the hard disks used by PIC.

PIC is down 52% in 6 months, vastly underperforming the Footsie by a massive margin. It currently trades at a PER of 2.39, a PBV of 0.58, and has a yield of 4.8% (despite having a dividend cover of 8.6). Analysts expect dividends to increase throughout 2011 and 2012, although I wouldn't count on it. Seeings as PIC isn't really what you call a "dividend share", the company would probably be better off conserving cash and paying off debt.

Like I say, I have been wrong at every stage on this share.

Stripping out exceptionals, I calculate an EBITDA of £88.4m (DB02/25), and net debt of £181m. This gives an Net debt/EBITDA of 2.0, so we're still looking safe enough at the moment in terms of debt.

Despite all the crud that's happened to this company, I still reckon it's a buy, albeit risky (did I mention that  I have been wrong at every stage on this share). My "variant perception" is that everything that has happened to this company has been the result of temporary setbacks, rather than a deterioration of trading per se. Mind you, any breakup of the Euro, bank failures, rising of sea levels, or hell being full causing the dead the roam as zombies, wont help.

What did we learn?

I'm always wary of this question, because I think that's there a big risk of learning the wrong lesson, or just being wise after the event. The general lesson seems to be is one of a "continuance of trends", I think. DPLM was a good company, and still looks a good company. RWD is "solid enough", but not great, as it is still in a bind with its pricing power. FCCN has been a flakey company for years, and so has been up and down. JD. seems to have a little extra which makes it much more resilient.

Against declining stock market, the defensive and quality companies have shown a better performance. I think there are two things at play here. The first is that quality coupled with good, if unspectacular, growth, has one out over the ropier candidates. It has paid to go with the trend, rather than against it. Secondly, the results could simply be an artifact of market conditions - high beta is a two-edged sword. Market volatility (as measured by the VIX) is high, suggesting that a move to some of the cruddier end of the market may prove more profitable. And yet, and yet, I have skepticism. We may yet come to see the economic picture deteriorate, in which case the solid companies will probably continue to do well.

Diary: FCCN, PIC

Dividends

In my last post I'd said that I'd look for dividend growers with a long dividends record. I produced a list of 117. I've whittled down the list further. The list comprises of non-micro companies (I don't have details of the threshold I used, but it should be above £200m) with dividends increasing every year, and a record of at least 10 dividends, including projected dividends. This whittles the list down from 117 to 67 companies (so about half of them have only short divvie histories). Here's a list of EPICs:

$ passes | tr -d \\n 
ABF  AGK  AMEC AVV  BAB  BAG  BATS BBY  BG.  BLT  BNZL CLLN CNA  CPG  CPI  CRDA CSN  CWK  DGE  DLN  DNO  DOM  DPLM FDSA FGP  FSJ  FSTA GNK  GRG  GSK  HFD  HILS HLMA HMY  HSX  IAP  IMT  IRV  ITRK JHD  JMAT MER  MTO  NG.  NWG  PAY  PHP  PNN  PSON PZC  RPC  RPS  RTN  SGE  SPX  SRP  SSE  SXS  SYR  TLPR TSCO ULE  ULVR VCT  VOD  WEIR WTB

The original list amounted to 537 companies, and just over 10% of them are in turn able to exhibit a long track record. As I mentioned before, special dividends and share splits will likely throw the numbers out; so some companies would have been unfairly rejected.

For the nerdy types, the list was compiled on UNIX, using Python and "Beautiful Soup", and Gfortran. Yip, good ol' Fortran, I had to see if I could get that one in there! The Fortran code was surprisingly intuitive and simple to write - so maybe it's a case of getting some good data structures. I have sometimes quipped that more programmers should be forced to write in Fortran, as its lack of fancy libraries forces the programmer to boil their algorithms and data down to the barest of forms.

FCCN - French Connection - General Retailers - 59.9p/£57.4m

I see that on 17-Nov-2011, FCCN shares dropped a massive 15.5% on tough trading conditions. I see that during the interims, revenues were £102.8m, and the operating profit before exceptionals was £0.2m. FCCN is heading into net-net territory, as it has a NCAV of £54.2m. Its margins do look the thinnest of thin, though, so I can well imagine it making losses if it's not careful. Difficult! On the one hand, "net-net", on the other hand, it's been a pretty weak company since 2005 by the looks of it, so maybe this is a net-net to avoid. I see, for example, that at the interim stage it 2005, it had a NCAV of £72.8m. It did improve a little thereafter, but then started going down again. Maybe things will keep heading south until they run out of money.



PIC - Pace - Tech hardware and Equip - 46.7p/£142.5m

Here we go again. On 17-Nov-2011, PIC dropped 24.5%, after announcing that it would suffer due to problems with hard drive supplies from Thailand. That puts PIC on a PER of 2.39. I hear that the word "covenants" was mentioned, with the news that they are safe. The word "covenants" to investors is a bit like the word "Macbeth" to actors: it doesn't matter the context or legitimacy, the mere mention of it is enough to bring bad luck. Difficult to imagine this dog getting any cheaper, but I've been wrong at every stage on PIC.


Thought for the day

"None of this means, however, that a business or stock is an
intelligent purchase simply because it is unpopular; a contrarian
approach is just as foolish as a follow-the-crowd strategy. What's
required is thinking rather than polling." -- Warren Buffett

Diary: PIC, CPP, IQE

Changing your mind

An author over at Seeking Alpha writes:

one thing I learned from Buffett was that the best companies to invest in are usually those you dismiss the first time you hear about them. It isn't until you move in for a closer look that you discover the true value of the company, and by then you have an edge over the market because most people do not bother to move in for a closer look.

PIC - Pace - Tech hardware and equip - 64.6p/£197.1m

The company's share price continues to fall, but Slashdot  reports that Logitech is stopping production on STBs (set-top boxes) for Google TV, calling it a "big mistake". Logitech Chief Executive predicted:

the "grandchild of Google TV" might succeed but not the current product. For now, that leaves Sony televisions with the Google software for people looking for the Google TV experience.

According to my calculations (DB02/21), it has a ROC of 96.6%, and UEY of 18.8%, putting it high on a list of magic formula companies.

CPP - CPP Group - Support Services - 145.6p/£249.6m

Some points from CPP's IMS on 25-Oct-2011:

• revenue grew by 6%
• costs and lost revenues associated with the ongoing FSA investigation have had a negative impact on margins. Discussions are ongoing.
• revenue growth in UK has been achieved despite the ongoing suspension of new sales of Identity Protection
• India and China drive revenue growth, and the directors see a lot of potetnial in those markets
• company has net cash at of £9.9m at 30-Sep-2011, compared with net debt at 30-Jun-2011
• anticipates continued revenue growth

For the 6 m/e 30-Jun-2011, revenues in UK amounted to £116.9m (68%) of the total revenues of £172.1m over all geographical regions.

On 09-Nov-2011, I estimated (DB02/20) that CPP had an EBIT of £49.1m, TEV of £17.2m, EV of £270.3m, implying a ROC of 285%, and UEY of 18.2%, based on a share price of 150p. It has since declined to 145.6p. Unsurprisingly, this company is ranking very highly as a magic formula company.

IQE notes

Here is a summary of some of the points made by Jessica Furseth in an article on IQE on 31-Oct-2011.

While other areas are becoming significant, IQE's success so far comes downs to the booming wireless tech industry.. "The smartphome cycle ... is still just beginning so we still see very exciting growth in this sector".

In 6 months to June, revenues increased 16%, pre-tax profits rose 28%, and it went from having £7m debt to £1m cash.

Only 28% of the world's mobile phones are smartphones, and this segment continues to grow rapidly. This increases the need for chips. Silicon is hitting its physical limits, so compound semiconductors, such as those from IQE, are more attractive. The economics of crystal chips are changing. IQE has 30% of global share. Dr nelson, co-founder of IQE in 1988, says that Intel believes these new integrated circuits may well become the future of chips, with the first products incorporating the new tech set to see the light of day by 2015.

Compound semiconductors use less power, and can store more data.

Intel's Light Peak cables, developed in partnership with IQE, will be launched in six to nine months.They are expected to replace USB-2 cables. Cost reductions are making this more economically viable.


The following information appeared in an article in Compound Semiconductor.

6" GaAs [Gallium Arsenide] epitaxial substrates will be the most prevalent, accounting for slightly more than 80% of total device demand over the 2010 to 2015 period. The demand in 2010 was for about 29,600 ksi (kilo square inches), and estimated to be 40,200 ksi in 2015.

Valuation Metrics

IQE has a share price of 20p, giving it a market cap of £105m. PER is 13.7, and it has net cash of £1m. PBV is 1.58, gearing -1.5%, and z-score is 3.21.

Diary: PIC

PIC: Pace - Tech Hardware and Equip - 80p/244m
Serial disappointer PIC disappoints again in a year in which it can do no right. In an RNS today, it announced:

Following the recent announcement by Western Digital Corporation that it has suspended production of hard disk drives at its manufacturing facilities in Thailand as a result of severe flooding, Pace has completed an initial assessment of the potential impact on its 2011 business. Because Western Digital is the major supplier of hard disk drives to Pace, this will negatively impact expected shipments of products with hard disk drives from this supplier during the remainder of this year. Pace estimates the worst case impact on 2011 operating profit to be $9.5m, before taking account of possible mitigating actions.  As a result, Pace's operating profit for 2011 is now likely to fall below previous guidance of $150m-$170m.

 The news sent the share price tumbling 13%. That puts in a PER of less than 4. Its gearing is 73%, which is discomforting. I wouldn't want trading prospects to deteriorate - although that worry doesn't seem on the cards at the moment. I noticed that the shares hadn't been rising and falling in line with the broader market lately, which suggests to me that the smart money had pretty much pegged the situation from the outset. If you believe that current conditions are temporary - and they seem to appear that way to me - then we could well look back in a few years time and see 2011 as an obvious buying point in retrospect. I have been hideously wrong at every stage on this share over this year, though, so caveat emptor. I continue to hold.

Diary: Peter Lynch, csinvesting, HIK

Peter Lynch
Here's an article in Yahoo Finance, which was originally published on Stockopedia, which advertises their screener. They put together the following criteria to emulate Lynch growth:

• Annual EPS Growth Rate >= 15% but <= 30%.
• PEG < 1.0
• Institutional ownership <50%
• Total Debt / Total Equity < 25%
• .Market cap less than $2 billion
• Operating Margin 5-Year Average >= 50% * Current Operating Margin. This is an attempt to screen for consistency of earnings, although this is difficult to do so effectively. One should ideally study the pattern of earnings, especially how they reacted during a recession
• Price-Earnings: The price-earnings ratio is less than the industry's median price-earnings ratio and less than the five-year average price-earnings ratio. Finding a good company is only half the battle in making a successful investment. Buying at a reasonable price is the other half
• No Financials

Lynch warns against:

• Hot stocks in hot industries
• Companies (particularly small firms) with big plans that have not yet been proven
• Profitable companies engaged in diversifying acquisitions. Lynch terms these "diworseifications."
• Companies in which one customer accounts for 25% to 50% of their sales

 One micro-warning signal, particularly important for cyclicals (manufacturers & retailers) is if inventories that are building up. If they are growing faster than sales, that is seen as a red flag. On the other hand, if a company is depressed, the first evidence of a turnaround is when inventories start to be depleted.

There is also a link to a discussion of growth investing on Stockopedia.

Blog: csinvesting
I just discovered a value-investing blog, csinvesting, which has some interesting content. Check it out.

HIK: Hikma Pharmaceuticals - Pharma & Biotech - 636.3p/£1.2bn
I was on the lookout for a growth company, and came across this stock. HIK is a pharmaceuticals company, with three segements: branded, injectable, and generic. It's on a PER of 18.97, so scrapes through as a GARP. Gearing is 41%, and interest cover is 10.6. It has net debt of £196m. I was going to write that off as an "immediate fail", but I think things aren't so bad. Net profit for last year was 61m, add back exceptionals of 3m, and you get an adjusted net profit of 64m. So it could pay off its debt in 3 years (196/64). It's median PER since flotation in 2005 is 18.7 - so it's about in-line. Revenue growth has been about 30% pa over the last 5 years, whilst operating profits have grown at a rate of about 24% pa. 5-year EPS growth is about 20%. Directors own about 30m worth of shares, which is a reasonably chunky amount. Median ROE over the last 5 years was 12%, which is a bit disappointing. I'd hope for 15%. Median 5-year operating margins were 19.6%, which look uninspired against AZN (Astrazeneca), which has a margin of 31%, and GSK (Glaxosmithkline)  of 34%. Take a look at the interview with CEO Said Darwazah for a run-down on the results for 2010. Motley Fool also wrote an article about it in August 2011. I can see the attraction in it, and I wouldn't necessarily rule it out as a GARP share. It doesn't seem to get much of a following on the boards. Perhaps one to keep on a watch list. If I had a choice, I'd rather have my CTN shares (I'm taking price into consideration).

Growth opportunities
My shares in IQE have been rocketing lately. I bought at the end of September, and have seen them go up 20% in the space of a little over 2 weeks. If only they all did that! It just goes to show that you can get some good things happen to you in depressed markets if you spot some companies with good growth opportunities. Much more exciting than owning those boring go-nowhere companies! IQE currently trades on a PER of 18.8, so I wont be looking to add more at these prices. This one to look out for dips. IQE hasn't been much of a victory for me, you should understand, because it only makes up 0.7% of my portfolio. I was waiting for my CTN money to come through, and anticipating further drops in the market.

I think there are some cracking growth companies still worth buying in the current markets. One is PTEC (Playtech), that provides software to online gaming companies. It's on a PER of 7.6, has ROE of 29%, and oodles of cash. Another one is PIC (Pace), the set-top box maker. It's on a PER of 4.4, has a ROE of 29%, although admittedly the debt situation is not good. Prospects do seem good, though. I also think SBT (Sporting Bet) offers very good value at a PER of 6.5, high ROE, and plenty of cash. I think it's important not to over-concentrate in a sector - especially in online gaming, which is one with many uncertainties surrounding it. If you're willing to cough up a little more, and go where there isn't as much growth, but still above-average growth, then I think there's quite a lot of opportunities: SN. (Smith & Nephew), BATS (Brit American Tobacco), MRW (Morrisons), DNO (Domino Printing Sciences), and I'm sure many many others that you could come up with that I had never even heard about.

Diary

PIC - Pace
I've talked about this STB (Set top box) maker quite a lot before. I see good growth potential (analysts have 2012 forecasts at 24% growth, for what they're worth). 2011 forecasts predict growth as down 9%, which is partly (but only partly) to explain for the share price weakness. At 98.1p, the shares are on a PER of 4.7, with a very noteworthy EV/EBITDA of 3.2. Pace just looks far too cheap. Think about those numbers for awhile. They're usually the numbers you would expect to see for a company that is in deep trouble, where its viability is coming into increasing doubt. I think this is far away from beeing the case for PIC. There is a lot of economic uncertainty in the world at the moment, that's true. Maybe we're heading for a global depression that will last decades, I don't know. Maybe there will be widespread personal bankruptcy or high levels of distress. IF those things happen, then maybe we can forget about such luxuries as watching the telly. Seeings as we don't know that, I'm suggesting that PIC is far too pessimistically priced. Its current ROE is 28%. Median ROE over the last decade was 19% - although there's certainly been volatility of returns. It looks like a nice little "magic formula" stock.

Belief in God and Cognitive Style
An interesting article is available here. It says:

that those with an intuitive cognitive style tend to have a stronger belief in God than those with a more reflective cognitive style. As defined in the study, intuitive thinkers make judgments quickly, based on automatic processes and instinct. Reflective thinkers prefer to pause and critically examine initial judgments before making a decision.

The study found that intuitive thinkers not only tend to believe more strongly in the existence of God, but their faith also grows more certain over time. Alternatively, reflective thinkers become less certain of the existence of God over time.

Tinywm
Nerd alert for all the Linux fans out there! From the site:

 TinyWM is a tiny window manager that I created as an exercise in minimalism. It is also maybe helpful in learning some of the very basics of creating a window manager. It is only around 50 lines of C. There is also a Python version using python-xlib.

Diary

IND - IndigoVision - Finals
IND make CCTV cameras that work over IP (i.e. over a local network). It issued a trading statement today, sending the share price down 19.4%. So, not good. I think it makes an interesting case study, which I want to talk about; probably tomorrow, though.


JD. - JD Sports Fashion - Interims
Intermins out for 26 w/e/ 30/7/2011
Revenues up 14.6%
Gross profit 48.0% against 48.2% comparatives
Operating profits before exceptionals down 12.7% - this was expected
Interim divvie up 7.9%
Acquisitions in Ireland (Champion Sports) and Spain (Sprinter) have continued the international expansion of the Sports Retail concepts.
Gross (i.e. inc VAT) LFL increased by 0.8%, but not a net basis fell by 0.9%.

ADVN sums it up quite well: 

Sports fashion retailer JD was in demand on the FTSE 250 after saying that while like-for-like sales fell by 1.6% in the first half, the group has returned to sales growth in the second half.

In fact, overall, I am impressed by newspapers in their ability to sum things up so succinctly. I tend to waffle too much.

I like this little snippet from the RNS (Regulatory News Service): "The acquisition of 8 Cecil Gee stores, from Msss Bross Group ... We believe that by applying out established merchandising and buying skills and disciplines it will have the opportunity to become a profitable standalone entity." That's an interesting observation: looking through Sharelock Holmes for MOSB (Moss Bros), I see that their operating profits are negative in 6 out of 10 years. So I think what we're saying is that MOSB management are useless, and that they could make a profit if it were only for the fact that someone knew what they were actually doing. I hope that the managment of MOSB aren't being overcompensated for their "achievements".

Share price is up 1.1% against FTAS (FTSE All-Share) down 0.5% at time of writing. It reports on current trading and outlook:

Trading since the period end has continued to improve ... The result for the full year remains very dependent on the sales and margin performance in December and January

PIC - Pace - News item
Pace Americas: "Home Media Center[sic]" (HR34 server hub) will launch in October, enabling DirecTV's multi-room DVR service. There is strong and growing demand for interconnected capabilities in the home. With HR34, all connected devices with the home network have access to stored recordings in the DirecTV Home Media Center. It works over coaxial cable or ethernet. It can deliver up to 5 HD streams around the home. It has 1TB (terabyte - that's 1024GB) storage. Link

PIC notes

Pace plc today announced that it has been selected by Norwegian cable company, GET, to develop the platform for its pioneering new converged home service. The hardware platform, incorporating Pace’s new next generation Media Gateway and companion HD client device, will deliver media content and data to a variety of devices, giving subscribers the freedom to utilise GET’s services when and where they want around the home.

Link