Qualiport

A portfolio update

By Bruce Jackson (TMF Googly)

Kilburn, London -- As you can see from the numbers at the bottom of this page, 20 days into the new year, the Qualiport is lagging the returns of the main indices. Whilst the underperformance of Marks & Spencer (MKS) shares obviously hasn't helped, neither has the fact that we've had £4000 sitting in cash earning a minimal return. It's not sitting there because we are fearing a market crash -- it's there because we haven't found a suitable home for it. Also, the FTSE 100 has been flying higher courtesy of the amazing appreciation of a relatively small number of companies in the telecommunications and pharmaceuticals sectors. If you don't own any companies from those sectors, at the moment it is very difficult to keep up with the index. That's not an excuse -- because nothing was stopping us buying shares in Vodafone (VOD) or Glaxo Wellcome (GLXO) -- it's just a fact. How long the market will keep urging forward on such a narrow front is anyone's guess.

It is very tempting to throw our valuation criteria out the window and just jump on the British Telecommunications (BT.), Zeneca (ZEN), Vodafone and Glaxo Wellcome bandwagons. These are all good companies with sound long-term prospects. By buying them, at the very least we should be able to match the returns of the FTSE 100 Index. However, that is just not the Qualiport's style. We are arguably suffering at the moment because of our valuation criteria, but things can change very quickly. Do you remember the carnage wreaked on the market high flyers back in September and early October last year? That's only 4 months ago. For many companies, valuation is currently being ignored by the market. That will change -- value investors just have to be patient.

There's been a little bit of activity surrounding some of our companies in the last couple of weeks. The Qualiport headlines have been dominated, and rightly so, by the Marks & Spencer profit warning. We covered that on Friday. As I said then, I don't think M&S shares are very cheap right now, so I won't even contemplate using some of our £4000 cash pile to top up our holding. In my opinion, there's nothing wrong with averaging down, or up, on a holding providing you are happy with the story. In the case of M&S, I'm decidedly unhappy with our holding in the company at the moment. They have a lot to prove. The size of the task ahead of them is emphasised by the fact that if they grow earnings by 30% per annum for the next 2 years, that will still only bring them back to the profit level achieved in 1997-98. With more poor trading figures out today, you don't need me to tell you that the retailing environment is not going to be easy over the next couple of years.

Before leaving M&S to sort out their autumn clothing collection, we did receive the interim dividend for the princely sum of £13.61, and this was added to the cash pile. We now have over £4000 waiting to be invested into the market.

Innocuously sneaking through the news wires last week was Rentokil Initial's (RTO) latest raft of acquisitions. Our portfolio stalwart picked up 8 companies for £37m in cash, which will add £49m in annual turnover. That's a price to sales ratio (PSR) of just 0.75 (37/49), and an absolute bargain when you compare it to Rentokil's PSR of about 4.7. The companies acquired are scattered around Europe and North America and expand Rentokil's hygiene and security services businesses. Although the £49m additional turnover is quite inconsequential when compared with their 1998 sales of £2.8 billion, it shows that Rentokil has its eye on the ball. I'm sure the Rentokil philosophy is one of keeping an eye on the pennies and letting the pounds look after themselves.

Rentokil Initial's year end was 31st December 1998, and we can expect their full year results sometime in early March. One would have thought that if they were going to fall a long way short of their 20% earnings growth target, they would have alerted the market last week, at the same time they announced the new acquisitions. The Rentokil share price has hit new highs in recent days, also potentially indicating that things are going according to plan. Over the very long term, I'm not a big believer in share price relative strength meaning much. But in the short term (up to a year), it can give investors some reassurance. The market very often knows, way before us poor individual investors, whether good or bad news is just around the corner, and that moves share prices. This is the insider dealing "nudge nudge, wink wink, say no more" network in action.

There's also been a bit of Unilever (ULVR) news to update you on. Last week there was one of those closed shop analyst meetings with the company. News usually slowly filters out into the public domain, but not until after the analysts have had the opportunity to trade in the shares. This is yet another type of insider dealing. At the very least, it is privileged information that the whole market should be privy to, not just a select set of analysts. Two major brokers were reported to have nudged their 1998 profit expectations very slightly down. For us long-term investors, 1998 earnings being 1% less than they were expected to be last week is completely inconsequential.

On Monday, Unilever announced the acquisition of Mountain Cream, a Chinese ice-cream business, for an undisclosed sum. Turnover is in excess of US$45m, so it is small beer to Unilever. However, Mountain Cream is the market leader in Shanghai and number two in Hong Kong and the southern part of mainland China. Primarily through their Wall's brand, Unilever are already the world's largest ice-cream producer, and this deal strengthens their commitment to China.

I have today put in the post a cheque for £288.75 for 33 new EMAP (EMA) shares at the rights issue price of 875p. This helps fund the Petersen Inc. acquisition. There's only a few of us posting on the EMAP message board, but we're not the only ones who think the Petersen acquisition is a perfect fit for EMAP. The management admitted they were paying a full price, and the shares took a bit of a pasting because of that comment. However, like EMAP, I'd rather pay a premium price for a good company than try to pick up a poor company on the cheap. We're backing the management and increasing our holding in EMAP. When the new shares are issued, EMAP will be knocking on the door of FTSE 100 inclusion.

Qualiwatch

I've been tinkering with the valuation of Dell Computer Corporation (Nasdaq: DELL), our first Qualiwatch company. Here's what I've come up with:

Current share price US$83
Current market capitalisation US$116 billion

Discount cashflow valuation -- net present market value of US$133.5 billion
PSR valuation -- 10 year CAGR of 11.5%
EPS valuation -- 10 year CAGR of 11.9%
ROE valuation -- 10 year CAGR of 11.2%
Discounted earnings valuation -- net present value share price of $US121

Arguably, the first and last measures give the best indication of Dell's potential valuation, and they also happen to be the most generous in terms of margin for error. The middle three valuation models are perhaps a bit more conservative, hence their lower compounded annual growth rate (CAGR).

In terms of valuation, this is a borderline decision. Over the past few years, Dell has consistently outperformed market expectations and grown at well above the market rate. However, they do currently trade on a January 1999 price to earnings ratio (P/E) of 78, which is hardly cheap. A fall to a P/E of 20 means the share price falling by almost 75%!

We can either decide to jump into Dell now, trusting that our discount valuations are closer to the mark than the other three measures, or we can set a price of about US$63 as the level we would be prepared to buy at, as this would give us a 15% CAGR for the middle three valuation measures. This is 24% below the current market price. I will defer the decision until Friday.

In closing, one of our other Qualiwatch companies, Vodafone, announced what looked like the great acquisition of AirTouch over the weekend. It will be very interesting to look at their valuation.

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                          15/1/99 Close

                   Company   Change    Bid
                     EMA     +0.15    10.87
                     IIG     -0.02     2.48 
                     MKS     -0.10     3.35
                     PIZ     +0.05     7.55 
                     RTO     -0.01     4.65
                     ULVR    +0.02     6.48

Qualiport Stocks

Last Rec'd  Total #  Company   In At   Current  Change
 19/12/97    783       RTO      2.55     4.65    82.4%
 27/10/98    755       IIG      2.58     2.48    (3.9%)
 04/11/98    245       PIZ      7.93     7.55    (4.7%)
 17/07/98    298       ULVR     6.72     6.48    (3.6%)
 17/04/98    169       EMA     11.85    10.87    (8.3%)
 11/05/98    368       MKS      5.54     3.35   (39.5%)

Last Rec'd  Total #  Company   In At     Value     Change
 19/12/97    783       RTO    2046.53   3640.95   1594.42
 17/07/98    298       ULVR   2052.54   1931.04   (121.50)
 27/10/98    755       IIG    1972.64   1872.40   (100.24)
 04/11/98    245       PIZ    1966.34   1849.75   (116.59)
 17/04/98    169       EMA    2052.57   1837.03   (215.54)
 11/05/98    368       MKS    2054.11   1232.80   (821.31)

Cash:                                 £4,007.60
Current Total :                      £16,371.57

Total Invested:                      £16,184.62
Profit/(Loss) :                        £ 186.95

Value Per Share

                    Day      Month      Year      
Qualiport         -0.10%    -2.61%     -2.61%
FTSE 100           1.29%     3.79%      3.79%
FTSE All Share     1.09%     3.24%      3.24%

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For an explanation of Value Per Share accounting, please click here.