Qualiport

[ December 13, 1999 ]

Sell To Buy?

By Bruce Jackson (TMF Googly)

On Friday, the Qualiport belatedly moved back into positive territory for 1999. The last time this real money portfolio hit those heady heights was back in early April, albeit only briefly. In fact, from the first trading day of 1999 -- January 4th -- when the Qualiport lost 1.37%, we've been constantly on the back foot, a bit like the England cricket team.

The move into the black is nothing to really gloat about. After all, the FTSE 100 index is up almost 15% in the calendar year, so the Qualiport is being soundly trounced. However, the last 7 weeks has seen the portfolio gain about 20%, from its low point of October 21st, the day before we made our first portfolio top up -- Emap (LSE: EMA). From that buy price of 788p, the shares in our media company have absolutely rocketed to above 1300p for a somewhat unbelievable short-term gain of about 65%. Whilst that's not quite an Internet-mania type gain, a la Freeserve (LSE: FRE) and QXL (LSE: QXL), it's very impressive going. Whether that short-term gain is sustainable, we'll just have to wait and see, but at the moment we're hardly going to complain.

The Qualiport is a long-term-buy-and-hold portfolio, and its success or not shouldn't be judged just on its performance in 1999 alone. Only over a 5-year period will we know whether the investment philosophy of this particular portfolio is working. In the two years since the Qualiport first bought Rentokil Initial (LSE: RTO), I've made at least 4 costly errors, these being:

1. Buying Unilever (LSE: ULVR) at the rarefied level of 672p.
2. Paying too much for Emap (1185p) the first time around.
3. Buying Marks & Spencer (LSE: MKS). Period.
4. Not selling Rentokil Initial, despite seeing their sales growth dry up well before their May 1999 AGM trading update/profit warning.

Hopefully I've learnt from those mistakes.

Looking at how the Qualiport stood as at December 30th 1998 compared to now, it's little wonder that we've underperformed the market in 1999. Here's what happened to the two biggest share holdings.

Company    % of Portfolio    Price      Price    % Change
           as at 30/12/98  30/12/98    10/12/99        

Rentokil       21%           451p        232p       -49%
Unilever       12%           672p        400p       -40%

Is it any wonder the Qualiport is struggling this year? The above table is not meant to be an excuse, because no-one was forcing me to hang onto those two companies. However, it does succinctly sum up the reason for the underperformance.

Moving on…

PizzaExpress

Back in September this year, I wrote quite a few articles about PizzaExpress (LSE: PIZ). They are linked at the bottom of this article. They were written before and after the company released its full year results, which were very well received by the market. In the days following the results, the shares hit a mid-price high of 850p, but since then have drifted lower, as is their wont. Having followed PizzaExpress for quite some time, I know that the share price goes through some periodic wobbles. In October 1998, admittedly when the whole market was wobbling, the shares sank to 575p. In August this year, as the market fretted in advance of final results, the shares dropped to 670p. In hindsight, both these short-term wobbles were not justified, based on what we know to date.

In the final one of those PizzaExpress articles I said;

"As for the rather vexed issue of valuation, I calculate the shares could be worth anything between 850p and 950p. These numbers are based on some reasonably optimistic growth rates, of about 15-18% per annum over the next 10 years, although I'd like to think they are reasonably realistic."

"I will look to top up on the Qualiport's holding in this excellent company should the share price fall to about 730p, or roughly 15% below the 850p valuation low point."

And guess what? PizzaExpress shares are now down to a mid-price of 725p. So, should I top up?

As with any investments, there's an element of risk involved. As far as PizzaExpress is concerned, I see the following as the risk factors.

1. UK saturation. With around 200 PizzaExpress outlets, the fear is that new openings will cannibalise existing sales as they expand to a planned 400 restaurants. Like-for-like sales growth is an excellent indicator of the sustainability of any concept.

                Like-for-like
                sales growth %    
   
   1995                 9%
   1996                12%
   1997                 9%
   1998                 9%
   1999                 2%
   16 weeks to Oct 99   1%
   

   That's not the direction shareholders want to see like-for-like sales going, and may well be an indication that the concept is losing appeal. For example, PizzaExpress has a good brand name in London, but is that the case in other parts of the country? Will the consumer's shift to value-for-money in the retailing sector be replicated in the world of eating out?
   
   

2. International. It is expected that much of the company's future long-term growth will come from international expansion, with agreements already signed for 22 territories. This is unknown and unproven territory, as competition will be intense, and the company has to build a brand name from scratch. How many successful international restaurant chains can you name? A straw poll of the Motley Fool office came up with McDonalds, Kentucky Fried Chicken, Burger King and Pizza Hut -- all in the budget fast-food category. Does Hard Rock Café make the grade? I'd argue not, and they're in the premium restaurant sector. It seems history is against PizzaExpress.
   
   
3. History & competition. Over the years, many roll-out / expansion type concepts have eventually seen growth come to a grinding halt. Recent examples include Electronics Boutique (LSE: EBQ), Oriental Restuarants (LSE: ORR) and JJB Sports (LSE: JJB). In the US, Dave & Buster's (NYSE: DAB), Planet Hollywood and Rainforest Café (Nasdaq: RAIN) -- all former fast-growing restaurant companies -- have hit the buffers in 1999.
   
   

That's the risks covered as far as I can work out. It's a little bit scary, hey? But, it's no use putting your head in the sand when assessing a company's prospects. Every single company out there, including the likes of near monopolistic Microsoft (Nasdaq: MSFT), faces challenges to grow the business. In the long-run, only the strong and the very best managed companies survive to provide shareholders with above average long-term returns.

Sell to Buy?

My bullish points for PizzaExpress have been well documented in the articles linked below. On top of those points, a recent experience has highlighted what I see as a buoyant economy and the continued trend to eating out. Last Thursday evening, around St Christopher's Place in central London, a group of 5 Fools could not get a table in any of the 20-odd restaurants, including one PizzaExpress outlet. Admittedly this is the silly season, and office Christmas parties were bolstering numbers, but even still I found this astounding.

Finally, and I'm running over tonight, before any buy decision is made on PizzaExpress, we first have to sell. The Qualiport is fully invested at the moment, a state of affairs that I normally try and avoid. However, the buying opportunities of 2 months ago were such that I felt compelled to spend the surplus cash. At the moment, those decisions look to have paid off, but it is only early days yet.

So, the big question comes down to:

Does PizzaExpress provide a better investment opportunity than any of the other 7 Qualiport companies?

I'm on record as saying Rentokil Initial and Unilever are on double secret probation. Should either or both of them be sold? And what about Misys (LSE: MSY) and Emap? Does the recent massive run-up in their share prices provide an opportunity to shave some profits?

My gut feel says sell Rentokil.

It's decision time Wednesday, but in the meantime all comments and thoughts are encouraged to the Qualiport message board.

Related Links

PizzaExpress

• Cash flow
  
• Results round-up
  
• ROIC and Cash Conversion
  
• Valuation

Other

• When To Sell

Qualiport Numbers
13/12/1999 Close

Company  Change    Bid
DELL(US)-1.10    41.50
EMA     -0.42    13.16
IIG      0.00     2.75
MSY      0.00     8.65
PIZ     -0.10     7.20
RTO     +0.01     2.33
ULVR    +0.06     4.06
LLOY    +0.08     7.71


Qualiport Stocks

Last Rec'd  Total # Company    Buy  Current Change

 22/04/99   542     Misys      5.57  8.65    55.2%
 17/04/98   301     Emap      10.20 13.16    29.0%
 27/10/98  1133     Indep Ins  2.60  2.75     5.8%
 29/09/99   356     Lloyds TSB 7.56  7.71     2.1%
 27/01/99    74     Dell (US) 44.63 41.50    (7.0%)
 19/12/97   783     Rentokil   2.55  2.33    (8.6%)
 04/11/98   245     Pizza Exp  7.93  7.20    (9.1%)
 17/07/98   266     Unilever   7.53  4.06   (46.1%)

Last Rec'd  Total # Company     In At  Value   Change

 22/04/99   542     Misys      3065.85 4688.30 1622.46
 17/04/98   301     Emap       3139.85 3961.16  821.32
 27/10/98  1133     Indep Ins  2990.63 3115.75  125.20
 29/09/99   356     Lloyds TSB 2723.20 2744.76   21.56
 27/01/99    74     Dell (US)  2007.42 1861.21 (146.21)
 04/11/98   245     Pizza Exp  1966.34 1764.00 (202.34)
 19/12/97   783     Rentokil   2046.53 1824.39 (222.14)
 17/07/98   266     Unilever   2052.00 1079.96 (972.04)

Cash:                                          £ 28.46
Current Total :                             £21,067.99

Total Invested:                             £20,184.62
Profit/(Loss) :                              £  883.37 

Value Per Share

                    Day      Month      Year      
Qualiport         -0.83%     5.79%     -0.24%
FTSE 100          -0.43%     1.72%     14.08%
FTSE All Share    -0.38%     1.78%     17.50%