VALUE INVESTING
A Brief Analysis Of Time

By Stephen Bland (TMFPyad)
October 22, 1999

By chance a company has appeared in the Investors Chronicle results pages today which I think is worth my commenting upon in our Value Investing series. I have mentioned before that I find the IC results pages are a great source of value shares, because they publish the key pyad criteria on the companies and a lot of other useful stuff as well. As always, I am grateful to the magazine for permission to reproduce their data.

I am sure that anyone following the value shares board and my advice to read the IC regularly as one of way of discovering appropriate shares, cannot have failed to notice this company. It does not have every single factor that I usually look for but despite that, it is a reasonably close fit and I would like to share my views on it.

The company is Time Products (LSE: TIP). It is one that has come up previously in my regular fishing trips through the market for value catches, using one of the well-known CD databases to which I subscribe. So I know a bit about it. I have avoided it in the past because its market cap is a little on the low side for me.

As regular readers will know, I normally set a minimum of £100m. This is not cast in stone, so I might bend it somewhat for a good case, but I have no interest in very small caps due to what I perceive as the increased risk of such companies, arising from the poorer quality and number of EPS forecasts – and for other reasons. Generally, small caps run contrary to my often-repeated mantra, which no doubt people are tired of hearing, regarding minimising the downside. Small caps add to risk, whilst my approach is concerned with reducing it.

The pyad Test

It is very simple to look through the IC company results for companies satisfying the four pyad criteria. In fact you have only to look at toughest filter of the four, the "a": assets per share, or Price to Book Value as it is more commonly known today. Very few companies will have P/BV under 1. Most weeks you will find none at all. End of filtering for that week.

I ignore the small company results because the IC conveniently puts these into a separate section. However, they define small cap as under £30m, I believe.

Even where you find the P/BV under 1, a quick glance at the other three features of pyad will let you know immediately if the company qualifies. Look secondly at "d", the absence of debt, better still net cash, because it is the second toughest filter to satisfy. If any company passes the first two, then look at P/E and yield. The whole initial filtering exercise can be done within a minute or two by simply glancing through the IC results.

This is what Time Products shows:

Net assets per share of 137p against a share price of 103p. Consequently P/BV is well under 1.

Net cash of £20m

P/E of 10 (which is the historical figure).

Yield of 7.7%

The company sails through the microscopic pores of the pyad filter. A second glance is therefore merited.

Note that the IC is reporting on the company because it recently published its half-year figures to 31 July 1999. Its year end is 31 January.

Other Tests

Next thing to look at is market cap. The IC quotes £50m, which is smaller than I would like to see. However that may not bother some readers too much. Note that the net cash of £20m is a huge proportion of the cap. In theory you could buy this company for £50m and straight away have £20m of it back in cash. In theory.

Even though it fails my personal market cap I want to go further with the company for the purposes of illustration. The next point, not in order of importance, is the EPS forecast.

A strongly rising EPS forecast is, I believe, critical to successful value investing as I have said on many previous occasions. It is the factor that is most likely to drive out the value in the share. For Time, the IC shows 12p for the year to 31 January 2000 and 14.4p for the following year as made by one particular broker. The 1999 actual was 13.3p per share thus indicating a fall is forecast for the current year.

For me this is not quite what I am looking for. I far prefer to see the EPS rise kicking in for the next year end, not the one after that. But in fact there is a fall forecast from 1999 to 2000. The year after may well be showing a good rise, but we are talking of a forecast rise against what is itself a forecast base figure. The risk is increased because of the unreliability of forecasts. Forecasts should be taken as a very crude guide only, you cannot in my view treat them as though they were actuals, hanging on every 0.1p as many people seem to do.

The Business

Time Products' main business is the distribution of expensive watches. The shares have collapsed over the last few years, as EPS has declined. EPS is the engine that drives share prices higher, and indeed lower, as can be seen here. Nothing wrong from the value investor's viewpoint with the collapse. In fact, deep value shares are more often than not companies that have fallen on hard times, but are about to recover. We aim to get in before the market has fully absorbed the recovery into the share price, or even started to notice it.

So what does it smell like? Well, I have to admit that I find the business slightly poncey. Most value shares fall into the category of basic, unglamorous, often what many people might see as boring industries. Specialised engineering, housebuilding and other fairly down to earth stuff. Necessities more than luxuries as a rule. Clearly, fancy watches fall into the latter category. More importantly, they are obviously highly dependent on a certain type of market, upon which the rising EPS must depend. A somewhat chancy market in my opinion. The smell therefore is neutral to mildly ripe. Not in itself a strong enough reason to avoid, but see my conclusion later.

At this point I will admit to wearing a pretty decent watch myself. A present from one of my admirers when I qualified as a chartered accountant a zillion years ago. Myself, since you ask. A while back, I had to have it serviced by the British main agent for the Swiss company. The service cost me about three times what the watch itself did to buy originally!

Other Factors

I have not had a chance to study the actual accounts of the company, so this whole article is based on my impressions from the IC plus my CD database. The IC writes that Time is selling its Judith Leiber handbags business, which should make £10m, thus boosting the cash pile to a very substantial level. In June and July 1999, the company announced a programme of share buybacks; financed, of course, by its cash holding. This may well continue according to the IC, which is good news for the share price.

Conclusion – Would I Buy?

No. Here's why.

Market cap fails my minimum of £100m. I have some flexibility here but I am not going to bend it that much.

EPS is forecast to fall in 2000, from the actual base in 1999, and rise in 2001. Too far into the future. I am interested in a good rise in the first forecast year after the latest historical one. Anything further out is higher risk. One year's forecast is risky enough. Two is asking for trouble.

Last and definitely least is the smell. Although my family hate me for it, I enjoy a nice bit of Camembert cheese. I do concede that it does to tend to create a certain atmosphere in the fridge and the whole ground floor of the house if you are not careful, leading one to think sometimes that perhaps the cat wasn't let out quickly enough in the morning. So smells are rather personal senses. One man's Camembert is another's French cheese. Time Products' products are not the usual value business. If all the other factors fitted perfectly I would not be concerned at all. But in conjunction with the more important failure factors I mention above, it is enough for me to reject it.

Remember, though, that all this is just my opinion. It doesn't mean that it won't soar away to make your fortune. It is in fact a powerful value share in my view: provided, and this is most important, that the 00 EPS forecast is maintained, then realised or exceeded as it becomes actual, and that the 01 rise forecast is then maintained or rises further. Equally I can't be sure that it won't collapse even more. However it does have very good downside minimisation in terms of high yield, P/BV and cash.

My rejection is because it has just that little too much risk for me for the reasons I've shown. Everything has to come together for me to go in: like a total eclipse, it has to line up perfectly. For those a little less worried about the sort of points that bother me, it might be interesting.

Let us know what you think on the Value Shares board.