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By Bruce Jackson (TMFGoogly@aol.com)
Baker Street, London -- My time away from the office on Friday was obviously the reason the Qualiport surged higher, led by EMAP (LSE: EMA) and Misys (LSE: MSY). In response, I'm thinking of taking the rest of the year off, and on my return expect the Qualiport to be firmly in positive territory.
Then again, maybe not. But it's a nice thought.
As for the reasons for the price surges in those two companies, one can only guess. Dare I say it was irrational exuberance? The whole Information Technology (IT) sector appears to be flying higher, led by US companies. And as Misys is the biggest UK-quoted IT company, the share price is an obvious beneficiary. Whilst it is nice to see that particular investment back in positive territory, I'm not getting too carried away. It is only early doors, the Qualiport having held Misys for less than 5 months.
Doesn't time fly?
I've commented time and time again about how the short-term movement in share prices often bears no relation to the underlying performance of the company. In fact, Stuart Watson (TMF Tiger) made that very point, using Glaxo Wellcome (LSE: GLXO) as an example, in Friday's excellent Fool's Eye View. So far in 1999, the Misys share price has traded between 448p and 698p, a 56% spread, yet the company has not significantly changed over that period.
There was an interesting article in the Sunday Business newspaper about Friday's other high-flyer, headed with "Emap's fortunes on the slide". It was not, as the headline infers, telling readers about how the company was struggling, but about how its share price had fallen, meaning EMAP is soon to be thrown out of the FTSE 100 index. That's hardly earth-shattering news for EMAP followers, as it has been common knowledge for some time now. However, one snippet of news I didn't know was that EMAP are the world's biggest consumer magazine publisher.
There were however parts of the article which shed a little more light on the reasons the stock market has jilted them, albeit in the short-term. This comment from Kevin Hand, the Chief Executive, was very Foolish: "We don't manage the company for the share price", and is consistent with what EMAP said when weak magazine circulation numbers were recently released, as per this message board post.
Obviously the weak circulation numbers had an adverse effect on the share price. But the City is said to be concerned about EMAP's plans to increase investment in new launches. Hello?! Is that not what many of these ridiculously over-valued Internet companies are effectively doing? That's not to say that EMAP should therefore be valued much higher than the current £2.6 billion (versus, say, Freeserve at £1.9 billion!), but that short-term pain for potential long-term gain is often viewed very differently, depending on the company. We shall see who's right come 5 or 10 years' time.
PizzaExpress (LSE: PIZ) announce their annual results next Monday 13th September. The nice people at the company very promptly replied to my email requesting attendance at the post-results analyst meeting, and have added me to the list of invitees. One thing I'll be very eager to hear about is their current like-for-like sales growth, as recently this has slowed from the almost obscenely high levels of years gone by -- in 1996 it was 12%, and in 1997 and 1998 a still impressive 8.7%. This is for restaurants open for more than 2 years, although in 1998 like-for-like sales growth of 7.7% was achieved in restaurants open for 5 years or more.
Like-for-like sales growth is extremely important, as it gives you a very good indication as to whether a concept is sustainable. In last Thursday's Fool's Eye View I wrote about the amazing performance of retailer Matalan (LSE: MTN), and commented then about the importance of like-for-like sales. And no -- I'm not considering Matalan for the Qualiport, because their retailing concept is as yet unproven, although clearly doing well at the minute. Perhaps they might be a candidate for our new real-money portfolio -- the Rule Shakers?
Anyway, back to PizzaExpress. Like-for-like sales growth for the latest reported period, the 6 months to December 1998, slowed to 3%, from about 9% in the previous corresponding 6-month period. Further to that, the outlook statement indicated that post December like-for-like growth may have slowed even further. Is this because PizzaExpress are close to reaching UK saturation, and there's beginning to be some new restaurant overlap, or because the domestic economy is struggling? I'm hoping it's the latter, but thinking it maybe a combination of the two.
On Friday I said I'd start looking at PizzaExpress in term of Economic Value Added (EVA), a valuation technique which succinctly sums up whether a company is actually creating shareholder value. Over the long-term, profit growth does not necessarily mean a company is adding value. For example, could it be that Rentokil Initial, (LSE: RTO) which significantly grew its profits by acquiring BET in 1996, actually destroyed shareholder value? Quite possibly.
Discounted cash flow (DCF) techniques are quite a popular way of valuing companies, and I like to make use of them too, because cash is the one number in a set of company accounts which can't be fudged. They do however have their limitations, as do all valuation techniques, but particularly when a company is creating little in the way of what is known as free cash flow.
I define free cash flow as operating profit, plus or minus movements in working capital, plus or minus interest income or expense, less taxes, and less capital expenditure. The last element of that equation is the most contentious, because there are two types of capital expenditure -- one being essential maintenance, and the other being what I call growth capital.
Take PizzaExpress, for example. They obviously have to spend money on their existing restaurants on things like new chairs and tables, and replacement ovens and fridges. Sometimes they'll go for a complete restaurant overhaul, involving some serious spend. At the same time as they're doing that, they are spending on brand new outlets. One of the problems of valuing a company using DCF techniques is separating out the distinction between essential capital spend and growth capital spend, because this is rarely reported by companies. By default, many people use the current depreciation charge as a proxy for essential capital spend.
I've run over for today, but will carry this on on Wednesday. For those interested in a bit of light bedtime reading on DCF's, a trip to the Fool's School and the How To Value Shares series may be in order.
As for my golfing exploits, if I said the post-round shower was the highlight of the day, perhaps you'd get an idea of how things went out on the course. I did find that my slice (thanks to TMF Eagle for the Foolish tip, albeit a little late for Friday's round) was not my only problem -- putting is not easy either. Let's see, 3 putts per hole x 18 holes&Best if I stick to cricket.
The Qualiport message board remains open for business.
Company Change Bid DELL(US)+1.65 49.40 EMA -0.12 10.26 IIG -0.02 2.77 MSY +0.15 6.15 PIZ 0.00 7.20 RTO -0.03 2.58 ULVR +0.01 6.02 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 27/01/99 74 Dell (US) 44.63 49.40 10.7% 27/10/98 755 Indep Ins 2.58 2.77 7.4% 22/04/99 347 Misys 5.76 6.15 6.8% 19/12/97 783 Rentokil 2.55 2.58 1.2% 04/11/98 245 Pizza Exp 7.93 7.20 (9.1%) 17/04/98 169 EMAP 11.34 10.26 (9.6%) 17/07/98 266 Unilever 7.53 6.02 (20.0%) Last Rec'd Total # Company In At Value Change 27/01/99 74 Dell (US) 2007.42 2215.52 208.10 27/10/98 755 Indep Ins 1972.64 2091.35 118.71 22/04/99 347 Misys 2028.71 2134.05 105.34 19/12/97 783 Rentokil 2046.53 2020.14 (26.39) 04/11/98 245 Pizza Exp 1966.34 1764.00 (202.34) 17/04/98 169 EMAP 2341.32 2072.52 (268.80) 17/07/98 266 Unilever 2052.00 1601.32 (450.68) Cash: £3,433.46 Current Total : £17,332.36 Total Invested: £18,184.62 Profit/(Loss) : (£ 852.26) Value Per Share Day Month Year Qualiport 0.39% 3.03% -7.83% FTSE 100 0.69% 2.07% 8.38% FTSE All Share 0.70% 2.11% 12.24%