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VALUE INVESTING
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My first value article of 2001 looks at this manufacturer and distributor of machine tools, based in Leeds but selling worldwide. Quite a famous little company, The 600 Group (LSE: SIXH) (www.600group.com) is one of those shares that was once much bigger than its current capitalisation but fell on hard times, thus entering value territory. Here are the usual fundamentals: A value share in just about every respect then. It even trades at substantially below net current assets which in the last balance sheet stand at £72m. For followers of Benjamin Graham this was one of his criteria, but one that hardly exists any longer, particularly amongst large caps. 600 looks interesting. I might even have been tempted myself, were it not for its small capitalisation, that being water into which I would hardly ever dip my toe these days. So what went wrong in the past? EPS declined unbroken from 21.6p in 1996 to 8.6p in 1999 and the share price followed suit. Subsequently for 2000 there was a little recovery to 9.2p. A company making machine tools is clearly dependent upon the state of the engineering industry that comprises its customers. And engineering is quite a risky business. Against the background of declining EPS, rather oddly the company managed to reduce its debt then in 1998 went into a net cash position. Not a bad outcome from declining earnings. One cause for concern is the present lack of EPS forecasts. My data source suggests that updates are awaited. In lieu of brokers, let's look at the interim results for the six months to 30 September 2000. EPS was 4.1p, somewhat less than half that of the previous full year to 31 March 2000, which sounds disappointing. I doubt this is a seasonal business so that is not the reason. Looking further, I note that the company actually made a loss in the comparable interim for the previous year, so that makes the 4.1p look more attractive. The key question for the forecast to 31 March 2001, of course, is how well the second half is going to work out. In this regard the chairman reports in his statement with the interims that: "The group's major markets are now considered to have passed the bottom of the downturn and are starting to show signs of recovery," and "several major new products are due to enter volume production during the second half of the year, following their successful international launches..." I would characterise this directorspeak as cautiously optimistic. Another interesting quote from the interims is this: "Cash management continued to be a priority, resulting in the group's net cash balance improving by £1.2m to £16.7m." This means that around half of the company's capitalisation is now represented by cash. Personally, I love companies with some serious wonga upside. Not every value player shares my drooling over this feature but I've always found that it adds a lot to a share that is already deep into the value game. My conclusion, then, is that 600 has more attraction than a lot of small cap value plays but it is in a fairly risky sort of business. And there is my general dislike of small cap value shares because I see them as more risky than large ones, whatever the industry, for the reasons I have stated often. But for those who don't share these prejudices there could be something here. The feeling I get from reading the accounts and just staring at the wall in front of me, upon which is a clock I made out of an old computer CD, and thinking about machine tools, is that there may be some validity to the recovery noises being made by the chairman. Then there's the powerfully cheap fundamentals, even by our value standards. But patience would be required here even if the recovery blooms: this is not a fast-moving share, at least historically. Tempting. Where Next? Value investing discussion board