Qualiport

[ September 11, 2000 ]

Random Value

By Bruce Jackson (TMFGoogly)

Following on from Maynard's discovery of value play Dairy Crest (LSE: DCG) on Friday, I did some digging of my own. Maynard and I are obviously on a similar wave length, because Dairy Crest also came up in my sieves as a "cheap" company. My suggestion is Homestyle Group (LSE: HME). Like Maynard, I haven't done too much background work, so this wouldn't be a company I'd put straight into my own portfolio or the Qualiport.

Homestyle is a furniture retailer. It operates in a very competitive and cyclical industry, tracking the fortunes of the housing market both up and down. It is therefore not suitable as a long-term investment. But, there could be some value in the shares over the next 12 to 18 months.

Here's some quick numerical facts:

• At 332p a share, Homestyle is valued at £214m;
  
• Dividends per share are forecast to grow by 40.7% to 19p in the current year, equating to a prospective dividend yield of 5.7%. The following year the dividend is forecast to grow a further 16%, where the shares would yield 6.6%;
  
• Earnings per share (EPS) are forecast to grow by 44% to 40.0p in the current year, equating to a prospective price to earnings (P/E) ratio of 8.3. The following year earnings are forecast to grow a further 24%, bringing the P/E ratio down to 6.7;
  
• The prospective dividend is covered 2.1 times, and that cover is forecast to rise as profits grow faster than dividends.

Sector leader DFS Furniture (LSE: DFS) is a reasonable benchmark. It too is forecast to rapidly grow earnings over the next 2 years, where it would trade on a prospective P/E of 10. Although not in the same business, Carpetright (LSE: CPR) will also track the results pattern of the two furniture retailers. They trade on a forward P/E of 10.4.

It's quite possible I've missed the boat with Homestyle. Wouldn't be the first time! The shares were languishing at 76p in the early part of last year. A rise to 332p (they hit 456p) in such a short period of time is investing heaven. The housing market seems to be going off the boil, although it doesn't appear like we're heading into a housing recession this time around. Nevertheless, I'd therefore take the two-year-out 24% forecast earnings growth with a large pinch of salt.

Finally, if you've never before heard of Homestyle, that's because it's only recently changed its name. It used to be called Rosebys. The new name came about following the recently completed acquisition of Harveys Furnishing. The acquisition will have increased their debt levels, something that needs to be monitored.

You'll see below some more thoughts about this style of investing. The Qualiport is not about to go head first down the value route.

Random Thoughts

• A lot of money has already been paid for the UK and German 3G licences. A lot of money still needs to be spent in order to build the infrastructure to make the whole thing work. There's going to be lots of money sloshing about. Knowledgeable investors will know who some of the winners are going to be. Speculators will guess.

• Warren Buffett continues to be predictable but also to do the unexpected. Late last week, his company Berkshire Hathaway (NYSE: BRK.A) bought Shaw Industries (NYSE: SHX) for about $2 billion. Shaw is the world's largest manufacturer of tufted broadloom carpet. That was unexpected -- a consumer monopoly they are not! It probably goes to show why I lost this duel, titled "Can You Copy Buffett." The predictable part was that Buffett picked up the company after it had gone through a problem period, paying a relatively cheap price.

• There's an inherent problem with owning short-term value plays. You can't go on holiday for long periods of time. That may not suit some people. You have to keep a constant eye on the stock market. I'm not talking every day here, but at least once a week. That may not be practical for some people. I suspect many short-term value players find it harder to sleep at night than their long-term growth investor counterparts.

• There's nothing wrong with holding cash. Some of the world's best investors are currently holding lots of cash. Buffett is one, and Bill Ruane of the Sequoia Fund is another. If you enjoy and learn from reading Buffett's letter to shareholders, the Sequoia Fund bi-annual reports are in a similar class. Here's one quote from the latest report:

"...we have also identified companies with very low price/earnings multiples, limited growth prospects (but also minimal downside), earnings that are mostly cash, and the ability and willingness to return this cash to shareholders through dividends or share repurchases. While these companies may not be glamorous, the mathematics of their current valuations can provide very attractive returns over time."

• Great investments are only great in hindsight.

• There's no perfect company.

See you in our new Thursday slot, and/or on the Qualiport discussion board, where your views and thoughts are welcomed.