MARKET COMMENT
The Stunning Value of Scalextric

By Maynard Paton (TMFMayn)
June 13, 2001

Carburton Street, London -- Fans of smaller companies, value plays and Scalextric should investigate Hornby (LSE: HRN). Today's annual numbers from the maker of model trains and slot cars highlight the considerable investment merits of the company. Alongside the increasing popularity of the two toys, a chunky dividend yield, a cash mountain and share buybacks in the pipeline all make Hornby a very tempting investment.

After a couple of lean years, today's results show the benefits of Hornby's recent restructuring and change of marketing tack. Moving manufacturing processes to China, alongside the disposal of London offices and showrooms, have significantly reduced the company's cost base. Today's figures show pre-exceptional earnings rising 62% to £1.5m on turnover jumping 15% to £24.6m. A focus on adult collectors aided the company's top line, with strong growth across all product ranges. In fact, US sales of Scalextric have given the company cause for "real optimism". Hornby has high hopes of generating future revenues from PC-based Scalextric games too.

Although Hornby shares have surged 20p (15%) to 155p this morning, they still remain attractive on a number of traditional valuation measures. On a pre-exceptional basis, the shares currently stand on 8.4 times today's earnings per share (EPS) figure. With the company paying a full-year dividend of 12p, they also offer a dividend yield of 7.7%. The company's book value is 154p per share, 70p of which is cash in the bank. Indeed, should "circumstances be favourable", Hornby is looking to buy back up to 13% of its stock in the near future, repeating a similar sized purchase made in March.

In short, while Hornby is worth just £11m, the group exhibits great characteristics for value players who accept the inherent risks that smaller companies inevitable bring.

More: Read Hornby's final results | Learn about Value Investing