The third in a series where I refresh my opinions on the portfolio's current holdings.
I was tempted to do the final 5 in this post, but given the doubtless length it'd then get up to, and the fact that the last two are the ones I'm most uncertain about, I thought I'd stick with 3.
N Brown (BWNG)
Leaving N Brown (LON:BWNG) to this post allows me to comment on their results, released yesterday, which were met with positivity by the market. The shares closed up over 10% on what look, at first glance, rather uninspiring figures. Two things to say about that, I suppose - firstly, uninspiring compared to what? Boring, relatively flat results will be good for the share price if everyone was expecting a poor set of figures! Secondly, I wonder if much of the positivity comes from the bit the media seemed to have seized on - something in the outlook. The headlines, anyway:
|§ Total revenue||£379.3m||+4.3%|
|§ Operating Profit||£45.7m||-2.8%|
|§ Profit before tax and fair value adjustments||£42.0m||-4.5%|
|§ E-commerce sales||£196m||+12%|
|§ Adjusted earnings per share||12.48p||+3.1%|
|§ Interim dividend||5.45p||+3.0%|
|§ Sales from newly recruited customers||+20%|
|§ Sales for the six weeks ended 13 October||+10.1%|
The price movement after these results means that N Brown now trades on a P/E of about 11, and a forward P/E of slightly more than that. The problem with N Brown is how bizarrely it seems to straddle the two worlds - fast online fashion, like ASOS, with its sky-high valuations, and high-street retail (with the notable exception of the very well run Next) which isn't doing quite so well. Online sales are taking up more and more of the overall sales mix, but it isn't all one way - they're also opening bricks & mortar as part of their multi-channel strategy. Check out this news article, too; whiffs of that ultra-high growth, new frontier potential.
My biggest concern is still something I didn't fully appreciate when I first bought the shares in the first round of my portfolio, but after it being pointed out to me I think I grasped far better here. Simply - they make a lot of their money from the provision of interest on their store accounts. I'm very sceptical about the sustainability of that, and while I can see the big growth potential I also see that unwinding slowly. I'm not sure it deserves a big growth premium, then.
Verdict: Still a solid company with interesting potential, but I don't like the credit provision. Earnings look sustainable so it doesn't look expensive, but their might be better opportunities.
"Still a solid company with interesting potential" is probably quite a good opening line for Cranswick (LON:CWK) , too, which is up marginally against a market decline in the time I've owned it. The problem I have, I guess, is similar to the problem I have with Tullett Prebon - it just doesn't seem to fit in with the rest of my picks from a strategic perspective. If I had to aggrandise my rather haphazard approach to stock selection with a 'strategy' description, it would be buying companies which I believe are materially cheaper than they should be relative to recent performance, and waiting for the market to rerate. Cranswick, my opinion went, was more of a 'quality' pick - a company that has performed exceptionally well historically, and I reckon is likely to continue to do so into the future. There's a lot of talk about cost inflation for them - the rising price of pigs - but that's not something that particularly concerns me, in a similar way to British Polythene. If the company has some sort of pricing power and the market isn't distorted in some other way, I think these sorts of companies can manage cost inflation in the long-term. There might be issues adjusting, but that's to be expected.
The release their interims in about a month, but the trading statement they released earlier in October wasn't particularly positive on the margin front. It certainly sounds like management are trying to soften expectations for the next couple of years. Hmm.
Verdict: Certainly not my favourite company in the portfolio, but my mental rigidity irks me. The only thing that matters is how undervalued a company is or isn't - trying to split up into strategy 'buckets' is just limiting myself. On the other hand, it does genuinely look like the company may be standing still for a while. They could be better places to park the cash.
Dart Group (DTG)
The share price of Dart (LON:DTG) is as stubborn as ever, around the level it's wobbled since mid-2010, and still striking me as cheap. It's something Richard pondered recently on his blog - trying to perhaps justify their valuation - and the comments section of that post is equally insightful. Dart are going basically as expected. Revenue and profits have grown quickly, and even a tempering of that growth rate isn't particularly worrying given the amount of earnings (and assets) you're getting for your money at the moment. If I might venture two speculative ideas as to why the company so stubbornly sits at 80p:
a) Free float is relatively small, shares are quite illiquid
b) The dividend is tiny in comparison to its profits - the company keeps the vast majority of its cash. Without getting into the questions of cash again, one thing I suspect a high payout ratio does do is speed up the reconciliation of price and value. That's not to say they should pay more; if they can invest profitably, they should obviously continue to do so. Their current policy might push the payoff into the future for shareholders, though.
Does any of this change my original idea behind investing? No. Have the results since investing changed my perception of its fair value? Not really - nowhere near getting into sell territory, anyway.
Verdict: Hold with the understanding (as ever) it may take a while to hit what I consider 'fair value'.
Filed Under: Value Investing,