VALUE INVESTING
That's All Der Is To It

By Stephen Bland (TMFPyad)
May 24, 2002

I hold shares in Allders and have done for some months now. Originally a pyad share when I went in, based on latest results at the time, the cash part of the deal has changed into a small amount of debt with the latest half-year results to 31 March 2002 announced just a few days ago.

The earnings per share (eps) figures are not attractive for the half year, falling to 9.5p against 14.8p for the similar period last year. The six months that include Christmas are always the more powerful for a stores group. The directorspeak described this first half as "very challenging." He can say that again. I'll say it for him instead, it was "very challenging." In English, crap.

That said though, it is claimed that the reorganisation strategy for the company is "firmly on track" despite the effect on short-term performance. If this is firmly on track I would hate to see what is desribed as "off course". To be fair to the director concerned, he did not blame foot & mouth, September 11, bad weather, good weather, the pound, the dollar, the euro, the Great Fire of 1666 and all the other host of convenient disasters, totally unconnected, natch, with the company's business, that are a godsend to many directors seeking anything to blame but themselves for a fall in profits.

I do see light at the end of the tunnel though due to the effects of the reorganisation and have decided for the time being to stay in the shares. Bear in mind that I would not hesitate to dump if I could not still see something there. At present I am showing a small loss after bringing in the dividend of 5.4p paid recently but I never hang on to a losing share merely in the hope of recovery, only if I still see value reasons for doing so. Remember for a pure value player the buying price is irrelevant as is the resulting profit or loss at the current price. Shares, unlike the humans that own them, are emotionless, remorseless, amnesiacs. What matters alone is the current price and the degree of value it represents.

So I am for the moment going to give the reorganisation strategy a chance of delivering the goods, the outer if you like, in the form of a strong eps rise at some point in the not too distant future. The key point here is the comment from the company about £9m of annual cost savings, a huge figure compared with the profits. Risky because for it to drive up profits it assumes that profits will recover or at least remain as they are and that depends on the trading conditions in the stores. Saving £9m won't do much to eps if otherwise trading profits fall by that much.

Some interesting developments have occurred with for example the new Oxford Street store and other major refurbs and acquisitions and disposals. My downside minimisation elements are still largely in place in the form of a 30% discount to book and a yield of over 5% on my buying price. The cash has gone for the present as I said above but I have decided I am going to live with that. Mature retailers tend to build up cash but then periodically will spend it on refurbishment.

Note that I probably would not be buying Allders now, but because of the inertia between buying a share and remaining in it, on balance I am remaining in. I did give it a thought for a few milliseconds because I believe that you really need to think long and deep when making sell/buy/hold decisions, but hold won. It was a fairly close call I'll admit between sell or hold but my feeling is that on balance it probably stands quite a good chance of working out. It may be a bit of a wait but I'll hang in and see. That doesn't mean that I am committing myself to staying in for a longer haul, I never commit to anything, that would be too much like an emotional involvement which is bad for the fiscal karma, just that for the moment I am happy to remain in.

I am not going to go into deep financial analysis of the figures. I don't do much of that when deciding to buy a share and I am not going to do it now when deciding to stay in. Just a quick sniff really.

I may well be wrong here, won't be the first time and won't be the last. That is the risk I take and I hope that when I am wrong, that it does not hurt too much because of the protection offered by the financial condoms of good value characteristics.