Qualiport

[ September 29, 1999 ]

Fearful EMAP

By Bruce Jackson (TMFGoogly)

Baker Street, London -- Following on from the Qualiport buy decision of last Wednesday, in accordance with the Fool's trading rules, today we purchased 356 shares in Lloyds TSB (LSE: LLOY) at a price of 755.5p. Adding on brokerage of £20.17 and stamp duty (boo, hiss) of £13.45, the total consideration was £2723.20. This makes Lloyds easily the Qualiport's biggest holding, especially given some of the rather savage (irrational?) recent falls in the share prices of some of the existing holdings.

You go away for a long weekend, and the market goes ballistic. The first I knew of Friday's shock £21 billion Bank of Scotland (LSE: BSCT) bid for NatWest (LSE: NWB) was yesterday morning. That lit up the whole banking sector, and once again threatened to push the actual buy price of Lloyds TSB some way above the 750p (or less) I was hoping to pay. I say 'once again' because in the past the Qualiport has contrived to pay top dollar for some of its holdings because the price has moved since a buy was first mooted. However, over the long-term, providing the businesses keep executing, these annoying adverse share price movements should turn out to be immaterial.

I'll have more to say about Lloyds, its business, and particularly its valuation in the weeks ahead. In the meantime, can I point you to the message boards where some great ongoing discussions are taking place? There has been speculation on the Lloyds board that they are not Y2k compliant. Looking back at their interim statement dated 30th July, they said "…the Group's policy is to ensure that our systems and business processes are Year 2000 ready by September 1999." Obviously that doesn't say they are ready, and that's possibly wherein the speculation lies.

On the Qualiport message board, these three posts make interesting reading;

Good luck!
Oh no!
Long term

Don't be afraid to join in the discussion.

EMAP

When I saw the headline "EMAP PLC -- Trading Update, Etc" come across the newswires this morning, my heart sank. The scary combination of "Trading Update, Etc" and a weak share price usually converts into bad news. As Qualiport followers will know, the EMAP (LSE: EMA) share price has been extremely weak for quite some time now, having peaked at 1418p in March this year. Yesterday, the shares lost another 32p to 878p, leaving EMAP shares down 38% over the past 6 months. Ouch.

But, much to my relief, the trading update was relatively upbeat; the first line read:

"The Group as a whole has made the progress that it expected in the first six months of its current financial year and is currently trading in line with expectations for the full year."

This trading statement was no doubt issued by EMAP in an attempt to arrest the fall in the share price, hoping to calm the market's nerves and doubts about their recent progress. Initially it had the desired effect, putting EMAP into the 'Up' section of today's Fool Lunchtime News. But, by this evening, it was well and truly entrenched in the 'Vanquished' section of the Daily Fool.

It seems the market has taken umbrage at this part of the release;

"Turning to EMAP Petersen, advertising revenues have shown slightly slower first half growth than anticipated, but the rate of growth is expected to improve."

Petersen is the US company EMAP recently acquired, and for which the market thought it paid top dollar. The above statement confirms a fact -- that there has been a slowdown in the US business -- whilst saying that it expects things to improve. The market hates uncertainty, and expectation is far worse than fact, at least in this instance.

A weak share price, and EMAP falling more than 40% in 6 months passes that definition, more often than not means the market knows there's something amiss with a company. Despite the Benjamin Graham quote "In the short-term the market is a voting machine, but in the long-term it's a weighing machine", quite often the voters are correct. The market as a whole is largely an efficient beast, pricing in excellent future prospects for companies. Why do you think loss-makers such as Colt Telecom (LSE: CTM), Orange (LSE: ORA) and Freeserve (LSE: FRE) are on such high ratings? On the other hand, why is it that the share prices of JJB Sports (LSE: JJB) and Somerfield (LSE: SOF) have collapsed over the past couple of years?

Having said that, the market is not immune to mis-pricing a company. Who knows whether Colt Telecom, with its 1998 sales of £215 million, is worth almost £9 billion? Those who believe that valuation does matter, like myself, would say that Colt is over-valued and that greed is the driving force behind the share price's meteoric rise. On the other hand, JJB Sports, with its forward price to earnings ratio (P/E) of 9 and continued good growth rate, could actually be under-valued compared to its future prospects. That's potentially the other short-term market driving factor at work -- fear.

Holding the middle ground is a company like PizzaExpress (LSE: PIZ). With the share price hovering around 820p, I reckon they are trading at about fair value. Sometime, somewhere in the long-term trading pattern of a share, the market will always value them correctly. Either side of that point, the twin short-term share price drivers of fear and greed are at work.

All that is a long way around saying that over the past 6 months, EMAP's share price has been driven by fear and greed. Up at over 1400p, in hindsight one could argue that the shares were over-valued. Down another 52p to 826p today, one could say the shares are potentially undervalued, given their position as one of the largest consumer magazine companies in the world, and their future growth prospects.

Just last Wednesday, with the EMAP shares hovering at about 950p, I postulated that they were trading just below their intrinsic value. With a 13% fall since then, they are arguably trading at a bigger discount to their potential net worth. But ultimately, it all depends on whether your estimation of the company's intrinsic value is correct, and whether you think fear is driving the share price down. The choice Fools, as ever, is yours.

Post your comments and questions to the Qualiport message board, please.

Qualiport Numbers
29/9/1999 Close

Company  Change    Bid
DELL(US) 0.00    43.00
EMA     -0.18     9.07
IIG     -0.08     2.57
MSY     +0.24     5.86
PIZ     +0.12     8.12
RTO     -0.03     2.17
ULVR    +0.12     5.94
LLOY    +0.07     7.63


Qualiport Stocks

Last Rec'd  Total # Company    Buy  Current Change

 04/11/98   245     Pizza Exp  7.93  8.20     3.5%
 27/10/98   755     Indep Ins  2.58  2.67     3.5%
 22/04/99   347     Misys      5.76  5.83     1.2%
 29/09/99   356     Lloyds TSB 7.56  7.63     1.0%
 27/01/99    74     Dell (US) 44.63 43.75    (2.0%)
 19/12/97   783     Rentokil   2.55  2.14   (16.1%)
 17/07/98   266     Unilever   7.53  5.87   (22.0%)
 17/04/98   169     EMAP      11.34  8.21   (27.6%)

Last Rec'd  Total # Company     In At  Value   Change

 27/10/98   755     Indep Ins  1972.64 2015.85   43.21
 04/11/98   245     Pizza Exp  1966.34 2009.00   42.66
 22/04/99   347     Misys      2028.71 2023.01   (5.70)
 29/09/99   356     Lloyds TSB 2723.20 2716.28   (6.92)     
 27/01/99    74     Dell (US)  2007.42 1962.12  (45.30)
 19/12/97   783     Rentokil   2046.53 1675.62 (370.91)
 17/07/98   266     Unilever   2052.00 1561.42 (490.58)
 17/04/98   169     EMAP       2341.32 1658.42 (682.90)

Cash:                                         £ 710.26
Current Total :                             £16,436.41

Total Invested:                             £18,184.62
Profit/(Loss) :                            (£ 1,852.64) 

Value Per Share

                    Day      Month      Year      
Qualiport          0.09%    -2.93%    -13.16%
FTSE 100           0.22%    -3.61%      2.35%
FTSE All Share     0.17%    -4.00%      5.52%