VALUE INVESTING
A Full-On PYAD Share

By Stephen Bland (TMFPyad)
July 19, 2002

I haven't done an individual company article for a few weeks now but this one caught my eye and may be of interest to some value players interested in small caps. 4imprint Group (LSE: FOUR) (www.4imprint.co.uk) is a supplier of promotional products, specifically those marked with a brand name.

Here are the usual fundies:

Share price  - 70p
52w high/low  - 200p/70p
5 year high/low - 531p/70p
Market cap - £20m
Eps y/e 31/12/01 - 8.7 normalised (reported –0.3, ie. a loss)
Eps forecast y/e 31/12/02 - 8.9p (lowest recent)
Eps forecast y/e 31/12/03 - 11.7p (lowest recent)
Forecast P/E for 02 - 7.9, for 03 - 6.0
Historical yield 3.2%
Prospective yield 02 lowest forecast - 3.7%, 03 lowest forecast - 4.2%
P/TBV - 0.7
Net cash per 01 accounts - 11.5p per share
One year relative strength: –55% (ie. relative weakness)
Directors own 1.5%, other majors 77%

The first thing to note is that along with many small caps there are few brokers making forecasts, only two in this case, one of whom is the tame house broker. In my figures above I have used the lower of the two for the sake of conservatism. Interestingly, the house firm was the lower eps for the 02 forecast whilst the other broker was lower for 03.

Using the consensus though makes this share a full-on PYAD choice which is how it came up in my trawls, the database being based on consensus forecasts. But even on the lowest figures I used, it fails only just on yield considerations, using my 50% above the market test, but passes on the three other criteria.

Looking at rising eps, there is only a small increase of 3% from 01 to 02 but a serious 31% rise expected for 03, and that is using the lowest forecasts.

The share price has undergone a nasty collapse in the last few years as my 5 year high/low above shows. In fact it is now at the lowest point in that time. No doubt this is due to the rapidly falling eps which, using normalised data, has dropped without pause from 46.9p in 97 to 2.7p in 00, rising to 8.7p for 01. However the 01 recovery did nothing for the share price which continued to fall, driving the share into decent value territory.

There is a very strong institutional presence on the share register, with fund managers like Prudential, Newton, Fidelity, Schroder and Artemis all holding pretty hefty chunks.

One major point of interest, sorry to delve too much into the company's business, is that around half its turnover is in the US, it being an American franchise business.

Recent directorspeak shows curate's egg symptoms. At the AGM in May 02 for example we had:

"In the US we have been winning corporate programme business from opportunities sourced by our franchise owners, including the previously announced significant new contracts with Union Pacific, Northrop Grumman and JCB North America....Market conditions in our direct marketing and partner services channels are slowly recovering and results overall in the US are broadly in line with the same period last year.

In the UK, our premiums channel has performed ahead of expectations but our other UK channels have not recovered as anticipated and the UK is therefore behind forecast for the period."

So, rather mixed then. Since the AGM the company has announced further big new US contracts, with the somewhat unfortunately named Leeson Electric Corporation and also the Union Planters Corporation. None of this seems to have benefited the share price which I conclude has been affected by bear market sentiment more than a fair appraisal of the shares. Perhaps the strong US presence has scared some investors because any recessional evidence there is likely to lead to cutbacks in the sort of promotional goods that 4imprint supplies.

It seems to me though that perhaps the fall has been overdone, if the forecasts have any credence. Unfortunately it is the 03 forecast where the real recovery takes place, not 02 which is more or less the same as the actual 01 figure. A farther forecast is always going to be less reliable than a nearer one.

I have a slight reservation about the name, but only slight. The nomenology is a bit too trick and clearly American in origin. However looked at from their point of view it is perhaps satisfactory where tortured English names like Uhaul and Toys'R'Us seem to be quite acceptable.

The usual small cap constraints and consequent additional risks must be considered by potential investors. The small number of brokers' forecasts is one point, as is a likely wide spread. But on the basic data, there may be something to go for here. Too small for me though.

I advocate strongly that anyone interested reads the full annual report which gives a lot more interesting information on the company, and that goes for any share.

Finally, and most importantly, I point out that the curate's egg saying is in fact completely misused and originally meant the exact opposite of its present meaning. It arises from an old Punch cartoon where a curate is eating with his superior and eating an egg which is rotten. Upon being asked by the latter whether the egg is rotten, the curate replies that it is good in parts, the comment being ironic due to his fear of the person. Thus if used correctly the saying should be a sarcastic observation that something is really bad all the way through, not that it is genuinely "good in parts," which is how it is used today.

I'm off for a ride on the Bonnie.