Recovering finances and a decent moat make AGA one to watch.
There's a lot to be said for buying a cyclical business at the bottom of the cycle. And there's little doubt that upmarket stove manufacturer AGA Rangemaster (LSE: AGA) has had a ghastly recession. Peaking at 440 pence in the heady summer of 2007, the shares had sunk to 55 pence by January 2009.
I've a soft spot for AGA. Our elderly early-1960s Rayburn cooker has yet again provided us with warmth, hot water and cooking facilities through what has turned out to be the coldest winter in thirty years. But AGA's Aga and Rayburn-branded stoves aren't cheap -- think of a figure of £5,000 or so -- and that's before often-hefty installation costs.
AGA's other brands are similarly exposed to a downturn in consumer sentiment, not to mention the housing market generally. Rangemaster cookers, for instance, are somewhat less expensive, but are still undeniably 'big ticket' items. Furnishing brand Fired Earth is another stalwart of 'Country Life'-type magazines, but also very far from cheap and cheerful end of the market.
Tough times
Put the whole lot together -- including some equally aspirational products aimed at well-heeled American consumers -- and you've a clutch of businesses destined to experience a tough recession.
And so it has proved. The share price went south at a rate that would put Olympic sprinter Usain Bolt to shame, closely followed by plunging sales and profits figures.
The directorspeak says it all -- and yes, for those who take an interest in such things, it turns out that 'challenging' isn't as bad as it can get. "Extremely tough" is how chief executive William McGrath described 2009 in the group's preliminary results released this morning.
Wipe-out
The numbers aren't pretty.
- Sales down 12% at £245 million
- Pre-tax profit down 96% to £0.5 million
- Basic earnings per share down 83% to 2.5 pence
- No final dividend
But there was good news. The company had "responded quickly and well to the downturn in the consumer markets," said McGrath, and net cash had risen from £5.8 million to £28 million. Cash generation and working capital management had been a major focus of attention, he added, and one that seems to have clearly paid off.
There were a lot of encouraging noises about new product innovations, too, as well as marketing initiatives and brand extensions. Footfall in the shops is buoyant, confidence is up, and all the signs are pointing to a better year.
Is it a buy?
Barring a double-dip recession, then, AGA would seem to have weathered the worst. And although the shares have recovered strongly from last year's lows -- up nearly 2% today at 122 pence as I write these words -- there still seems to be plenty of upside.
Bear in mind, too, what Warren Buffett would describe as the business's moat. If you want an Aga or Rayburn, or something from a Fired Earth catalogue, then substitutes won't do.
Despite this, valuation is tricky. The earnings per share of 2.5 pence declared today put the company on a historic P/E of almost 50, well up on 2011's forecast P/E of 8.
And I'm a little concerned about the company's pension fund situation. The AGA business today is what is left after Midlands metal-basher Glynwed Industries sold off its cast iron pipe interests, and the pension scheme's 650 current members are dwarfed by the 14,000 members remaining from Glynwed days. Currently in deficit, the fund is not forecast to be self-sufficient until 2020, with heightened AGA contributions being required in the meantime.
A final niggle: directors' shareholdings are a little lower than I like to see. McGrath, for instance, holds just 103,000 shares, despite considerable service. And apart from dividend reinvestment purchases, there doesn't seem to have been any director buying, even at the market's trough.
In short, a share well worth keeping an eye on. A lot of upside, a decent-sized moat, and recovering finances. Some of this is factored into today's share price -- but not all of it, I'll warrant.
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