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By Bruce Jackson (TMFGoogly@aol.com)
Baker Street, London -- By the time you read this, if you're a shareholder you'll probably have already read columns and columns of newsprint about the Rentokil Initial (LSE: RTO) interim results of last Wednesday. On that day, in this space, I recounted some of the titbits I picked up from attending the analyst briefing. If you want to see the slide presentation used by the company you can check it out at the company's website.
Prior to Wednesday, I thought I knew Rentokil pretty well. I'd never previously met, or seen any of the Rentokil management team in action, however I knew they must have been well respected in the City. With an earnings growth record such as theirs, over a such long period of time, they surely must have been respected, mustn't they?
Having said that, I'm sure the Rentokil management were also labelled arrogant in some quarters. Part of that could be down to the tall-poppy syndrome, whereby the successful people of the world are constantly chopped down because it's easier to criticise success than to praise it. Also, it was sort of weird listening to Chief Executive Sir Clive Thompson's posh voice talking eloquently about the company he runs, knowing that many of the blue-collar workers he employs are struggling to make financial ends meet because they are just earning the minimum wage.
I could tell, just from the tone of his voice, that the Sir Clive Thompson of last Wednesday was a much humbler man than he's been in the past. Despite this uncharacteristic demeanour, he's clearly quite an impressive character, with a dry sense of humour, and he has an intimate knowledge of the business he runs.
Rentokil have had problems, and Sir Clive admitted as much. Part of these problems could be put down to arrogance of the company. For example, in the past they could get away with charging premium prices for blue-collar services such as security, cleaning or catering. These days, as competition has become more intense, and Rentokil have found themselves with a portfolio of non-blue chip clients, price is the overriding consideration for client companies. Rentokil, and this is where they could be labelled aloof or even arrogant, refused to cut their prices when tendering for existing or new work, and consequently lost the job.
This obviously affects sales growth -- here at Fool HQ, we've labelled that as "negative sales growth". Rentokil admit that it took them longer than it should have to realise this situation was occurring, but by then a lot of the damage had already been done.
Enter the humbler Rentokil, and their new objective to "substantially outperform the support services sector over the next five years." Gone are the go get 'em days of earnings growth above everything else. Now Rentokil are considering enhancing shareholder value by way of disposals, share buy-backs and special dividends. What has happened? Dare I say it -- that Rentokil is an ex-growth stock?
There are many challenges for this proud company as they march towards the new millennium. They've progressively got bigger and bigger through a series of 300-odd acquisitions in the past 17 years, but only now, possibly courtesy of their size, are they finding growth opportunities drying up. Those operating margins, obscenely high in comparison to their competitors, are under extreme pressure, and Rentokil are now considering a more "flexible" pricing policy, meaning they'll consider bidding for margin dilutive business, as long as it is profitable.
As a current shareholder, and a prospective non-shareholder of Rentokil -- read nothing more into that statement than is already there, as it refers to my position in other companies too -- I have to decide whether:
1. Rentokil will "substantially outperform the support services sector";
2. The support services sector will outperform the rest of the market;
3. My money is better invested elsewhere.
As ever, there's no easy answer. I'm very much inclined, especially with the shares at this depressed level, to hang in there. Rentokil is still run by a proven management team. Their return on equity (ROE) runs at about 13%, which is hardly earth-shattering, and is depressed by the large amount of purchased goodwill courtesy of the BET acquisition.
Obviously Rentokil is a different company from the one I first invested in back in December 1997. Could I have seen it coming? Well, I did see some deterioration in the business as far ago as August 1998, as sales growth for the second half of fiscal 1997 slowed dramatically. The Hindsight Portfolio (copyright TMF Essex), soundly thrashing the Qualiport, would have sold the shares about then at about 365p.
As for option 3 above, with the Qualiport sitting on a decent sized cash pile, it's not currently an issue. And, whilst on that note, let me reiterate that the cash is not sitting there because I'm afraid there's going to be a market crash just around the corner. It's just that I haven't found a home for the money as yet. However, it looks like there could be a few opportunities starting to appear.
EMAP (LSE: EMA) for example are getting cheaper by the minute. They probably deserved to be marked down the odd percentage point or two following on from last Friday's news of circulation falls in some of their magazines. However, that price fall has probably been accelerated because of fears of EMAP's removal from the FTSE 100 index, therefore forcing index trackers to sell the shares.
In my mind, that's all short-term noise. As long as the underlying company is still performing well, that's all that really matters to me. Obviously, in the long-term, I'm hoping the share price will outperform, and if EMAP continues to pump out 15% year on year growth, that should be the case. As Benjamin Graham, author of investment classics such as The Intelligent Investor, said: in the short term the market is a voting machine, but in the long term it is a weighing machine.
In closing, for more on Dell Computer Corporation's (NASDAQ: DELL) superb second quarter results, I'm again going to point you to our US site, and this article by Dale Wettlaufer. When I was writing the buy report for Dell, back in January this year, I assumed they'd earn 73 cents per share in fiscal 2000 and 98 cents in 2001. Current consensus forecasts stand at 75 cents and 101 cents respectively. Little has changed since I bought the company, both in terms of current share price and short-term earnings estimates. I find it quite amusing that over that same time period the shares have traded between US$54 and US$33.
Have a great weekend, and see you Monday. In the meantime, all comments, thoughts and suggestions encouraged to the Qualiport message board
Company Change Bid DELL(US)-0.70 43.80 EMA -0.07 9.90 IIG 0.00 2.87 MSY -0.04 5.34 PIZ -0.20 7.60 RTO 0.10 2.35 ULVR +0.03 5.80 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/10/98 755 Indep Ins 2.58 2.87 9.9% 27/01/99 74 Dell (US) 44.63 43.80 (2.1%) 04/11/98 245 Pizza Exp 7.93 7.60 (5.3%) 22/04/99 347 Misys 5.76 5.34 (8.7%) 19/12/97 783 Rentokil 2.55 2.35 (10.1%) 17/04/98 169 EMAP 11.85 9.90 (14.6%) 17/07/98 266 Unilever 7.53 5.80 (24.8%) Last Rec'd Total # Company In At Value Change 27/10/98 755 Indep Ins 1972.64 2166.85 194.21 04/11/98 245 Pizza Exp 1966.34 1862.00 (104.34) 22/04/99 347 Misys 2028.71 1852.98 (175.73) 27/01/99 74 Dell (US) 2007.42 1964.36 (43.05) 19/12/97 783 Rentokil 2046.53 1840.05 (206.48) 17/04/98 169 EMAP 2341.32 1999.80 (341.52) 17/07/98 266 Unilever 2052.00 1542.80 (509.20) Cash: £3,433.46 Current Total : £16,662.31 Total Invested: £18,184.62 Profit/(Loss) : (£1,186.11) Value Per Share Day Month Year Qualiport -0.60% -1.82% -11.40% FTSE 100 1.03% -0.82% 5.07% FTSE All Share 0.88% -0.47% 8.88%