This company has attractive looking price ratios, healthy forecasts, and manageable debt -- it might be a nice little earner in these troubled times.
Yesterday I had a look at the Price to Sales ratio (the PSR), and concluded that a company with a low PSR compared to its peers might be worth closer inspection. We also saw that a company's debt position can distort the meaning of the PSR, and with a lot of companies currently struggling with borrowings, we need to bear that in mind too.
So armed with those thoughts, I went in search of some companies with low PSR figures to see if I could find any bargains. And I think I might have found one.
Paper profits
Amongst the shares with Price to Sales ratios of not much more than zero are to be found the tumbleweed of the stock market, the companies with suspended share prices and a near certainty of being blown clean way, and so I was rather surprised to see John Menzies (LSE: MNZS), the newspaper distribution and aviation ground handling company, languishing down there on a PSR of just 0.05.
With a market cap of just £79m, Menzies turned over £1.67b in 2008 -- that's £28 per share, with the shares rated at a lowly 132p. The year ending December 2008 was certainly a poor one, with earnings falling 70% to 14p per share. But the next two years should see some significant recovery, with earnings per share coming in at 26p and 34p for this year and next -- rises of 89% and 28% respectively.
Prospective dividend yield of 2.5% is nothing much to shout about, with there being far better dividend payers to be had these days, but it's not unhealthy. And the prospective P/E at approx 4.5 is very low for a viable company. So why the very low valuation, and is it a bargain?
It's all in the debt
We also saw yesterday how we can bring debt into the equation by adding a company's net debt figure on to its market capitalisation before calculating the Price to Sales ratio. The reason we would do this is that, when we own a company, we don't really own the part of it that is owed to the banks, just as we don't really own the full equity in our homes when they're mortgaged. So adding back the net debt to the market cap gives us a feel for how the shares would be valued if there were no debt.
Menzies had net borrowings of £164m at the end of 2008 (up from £108m the previous year), so if we add this to the market cap we get a total of £243m, giving us a PSR of 0.15. That's a lot higher than the raw 0.05 figure, but it still makes the shares look cheap.
The latest picture
Last month Menzies issued an interim management statement, and the pictures for the two arms of the company look somewhat different. Aviation cargo volumes were down 26% on the same period last year, which isn't good, though perhaps not surprising in the current global economic climate. But the company believes that its operating model is flexible, geared towards serving the strongest airlines in the most attractive markets, and tell us that cost-cutting is underway.
On the newspaper distribution front, Menzies has had "an excellent start to the year", and tells us "The contract renewal process has been extremely successful with over £130m additional revenue secured to date - with contracts starting between October 2009 and January 2011 - both in new areas outside our current footprint and in areas we can serve from our current network". Menzies' share of the UK market is expected to grow by 43% as a result.
A bargain?
The interim statement said nothing about the debt situation, and that's what we'd need to scrutinise carefully when the first half results are out. But with such low PSR and P/E figures, there is probably even room for net debt to rise a bit and the shares still look good value. Interest cover, at 1.6, is still keeping ahead of the company's net debt as a proportion of total enterprise value.
Nearly half of the analysts offering recommendations at the moment rate the shares a Buy, with the rest having them on Hold.
With an economic recovery possibly coming sooner than expected, I think there could well be too much pessimism in the Menzies share price right now, and this quick look suggests that with a bit more research, it could be worth tucking some of these shares away.
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