Discussion board favourite Fayrewood has been arguably "cheap" for ages, yet the share price has kept falling; can we learn any lessons from this?
Fayrewood
(LSE: FWY)
, a smallcap IT distributor, has built up a strong following on The Fool's discussion boards over the last three or four years, but, sadly, I fear that at least some of our posters have lost money from the share. That includes me -- I finally admitted defeat and sold my shares at a modest loss in March. The share price was around a pound then.
Since then the share price has kept on falling, and it's slipped a further 5p this morning to 77p on weak interim results.
With a low p/e, the shares looked attractive to me at 130p, so I want to know what I did wrong. Can I learn from this experience and become a better investor as a result?
I guess the biggest warning sign was the substantial share sale by the then chairman, Pierce Casey, in November 2004. He left the company six months later and sold his remaining shares (a 4.9% stake) at that point.
The crucial point about Casey was he wasn't a semi-retired non-exec chairman. He's a highly entrepreneurial man who had co-founded the business. When he sold the shares, he wasn't even 50. He clearly thought he could find a better home for his money than Fayrewood, and if he thought that..
At the time, I said to myself , yes, Casey was going, but his fellow co-founder Paul Griffiths was staying as CEO and Griffiths wasn't selling any of his shares.
I should say here that I used to write about Fayrewood in a previous job back in 2000-2002 and I met Griffiths on at least three occasions back then. I liked and respected him -- I still do now -- but I think there's a danger you can "fall in love" with a CEO, just as you can fall in love with a share.
But I think Fayrewood's biggest problem has been that its core businesses operate in a low-margin environment. So much so, even an able boss like Griffiths has found it challenging.
The core activity is distributing computer-related products to retailers in Spain, the UK and France. Products include printers, memory sticks and the like. Operating margins are inevitably low in this kind of business -- in today's results, they're about 1.8%.
In recent times, the Spanish business has performed more strongly, perhaps because the Spanish IT market is less well-developed. There are more small "mom and pop" computer shops there, and fewer PC-World style sheds.
So for me, the most worrying statement in today's results was: "Whilst [Spanish] sales increased by 5% the sales mix has been less favourable, to the detriment of margins."
I'm not saying that Fayrewood is doomed to fail from here. You can make a good case that it's a decent investment. At 76p, it's trading on a forecast price/earnings ratio of 4 or 5 for this year. Improved management of working capital is reducing debt, and the balance sheet looks good to me.
What's more, Fayrewood owns a 27% stake in a German high-end distribution business called Computerlinks. The stake is currently worth around E23m (£15.5m), so that provides some underpinning to the current £39m market cap.
In other words, Fayrewood might be a decent investment now, but for me, I still worry about margins and the long-term competitive position. Once bitten twice shy, I'm staying out.
And, in future, I'll pay more attention to margins and I'll also be very concerned if I see substantial share sales by a relatively young executive director.
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