Clinton Cards is on the mend, while YouGov could benefit from its emergency surgery.
This time last year, any stock market equivalent of an A&E hospital would have been crammed with smaller companies.
Or rather, the corridors and waiting rooms would have been. With the priority beds occupied by giants like Lloyds Banking Group (LSE: LLOY) and Land Securities (LSE: LAND) who needed their own emergency surgery and massive cash infusions, the little guys hardly got a look in as their share prices plunged at a record rate.
Time is a great healer though, and while nobody seems sure how sustainable either the stock market or the economic pullback really is, many of the small cap walking wounded have already perked up – or even come back from the dead.
Holding a broad basket of small caps via an investment trust such as the BlackRock Smaller Companies Trust (LSE: BRSC) has been a good way to enjoy this revival -- the shares have doubled since January.
Investing in individual shares has been a more hit-and-miss, of course, as final results from two former small cap stars this week have demonstrated.
Played its cards right
It's fair to say that our first patient, Clinton Cards (LSE: CC), has surprised even its doctors.
Its share price was slashed by more than 90% from its 2008 highs and approached 4p in December. The company was priced to go bust. Sales were falling, but more importantly investors fretted it might not meet its debts obligations.
Yet the shares are well ahead today; they have multiplied ten-fold since the low point, and as I type are up 17% to 41p on the back of promising finals.
Clinton Cards is a clear beneficiary of the 'dash to trash' rally, but as with most such multi-baggers there's a story behind its resurgence.
Firstly and crucially, Clinton Cards renegotiated its banking facilities in late March, pushing a £12 million debt repayment that was coming due in November 2009 out into future years and taking it off the critical list. At the same time it reported interim profits had halved, but it added that sales were benefiting from the collapse of Woolworths.
Next, in May, Clinton Cards put its Birthdays subsidiary into administration. The venture was losing about £7 million a year, due to 50% of the stores making losses.
In June it re-acquired 196 of the 332 stores for just £250,000 in light of Birthday's outstanding debts -- presumably including the profitable 50%! Some were disgruntled by the fancy footwork, but CEO Clinton Lewin stressed the move saved 1,450 jobs.
The results are evident in today's results. Clinton says its 180 ongoing Birthday stores will be profitable in the current financial year; across the group like for like sales were up in the second half to August (though still down over the year).
Meanwhile net debt has fallen £8.5 million to just under £50 million, and cost control measures have apparently saved some £2.5 million.
What about earnings? Clinton Cards' profit before tax of £24 million includes a £13.5 million exceptional profit on the acquisition of Birthdays -- the chain it owned for much of the year anyway! Adjusted earnings per share were 7.7p. I'm not going to pretend I can unpick a sensible year-on year comparison here, given all the restructuring.
Today's strong rise puts the shares on a historical P/E of just over 5. Analysts were forecasting earnings per share of 2.6p for the next year prior to the release of these results, for a forecast P/E of around 16.
These estimates will likely be revised upwards; Chairman Don Lewin says Clinton stores' sales rose 2.9% in the first ten weeks of the new year. But much will depend on Christmas and the British consumer -- not something I'd rely on as unemployment continues to climb.
Some are doubtful about the future of greetings cards, but Clinton Cards has been a remarkable turnaround story already -- a company that looked near dead valued at £82 million.
Our survey said…
In contrast, Tuesday saw final results from a small cap that's hopefully suffering from a nasty bout of seasonal flu rather than anything more serious.
Online polling company YouGov (LSE: YOU) delivered five years of double-digit profit expansion that took its share price above 200p in early 2008.
But the final results reported a well-flagged fall in normalised profits before tax of nearly 60%, to just £3.9 million.
The company blamed rising costs rather than a declining demand for its services. True enough, turnover rose 10% to £44 million over the year, partly aided by new research focussed on the recessionary climate.
There were other positives in the results, too -- net cash of £12.5 million and promising noises about the successful integration of a US acquisition that is providing a new technology platform to extend YouGov's worldwide research.
As for the bloat, YouGov has shed staff and together with other savings it says this will hack £2.5 million out of its overheads.
Analysts expect earnings to recover 10% to 3p a share in 2009/2010, for a forward P/E of around 17. That's hardly a bargain basement rating, but then YouGov can seemingly rebuild much of its earnings from here just by tightening up on its outgoings.
Having received a sharp lesson in the dangers of over-expansion, I suspect the entrepreneurial founders -- who still own around 12% of the £49 million company -- to emerge wiser and stronger, and able to deliver the tough love required to nurse YouGov back to health.
More from Owain Bennallack:
Note: Owain owns shares in the BlackRock Smaller Companies Trust.
