Last year, Tungsten (LSE: TUNG) looked like it was set to become one of the market’s most promising growth stocks.
Investors clamoured to get their hands on the e-invoicing service’s shares, bidding up the loss-making company’s market value to a lofty £400m.
However, Tungsten has failed to live up to the market’s lofty growth expectations. Moreover, and sensing blood, City traders have placed hefty short bets on the company, pushing its share price down by 70% year to date.
Missed expectations
Traders and speculators can’t be blamed for all of Tungsten’s problems. Indeed, the company itself has failed to yield the lofty returns promised by management when it first came to market.
For example, Tungsten revealed last week that only 20% of the customers that it had signed up to use its invoice-financing facility had been able to borrow money. Lengthy background checks have restricted customers’ access to finance.
Tungsten had been aiming to lend out £58m by the beginning of this year. So far, loans outstanding only amount to £32m — that’s a big difference.
Risky business
Growth stocks like Tungsten can’t afford to miss expectations by such as wide margin.
As Tungsten is yet to report a profit, investors and analysts alike have nothing to value the company on apart from its growth projections.
If management is struggling to meet these targets, it becomes almost impossible to place a value on the company’s shares.
Crunching numbers
After factoring in reduced growth expectations, City analysts don’t expect Tungsten to report a pre-tax profit until 2017.
Analysts’ figures suggest that the company will earn 14.3p per share for fiscal 2017, which puts Tungsten on a 2017 P/E of 8.4.
This seems cheap at first glance. However, Tungsten has shown over the past 12 months that it is struggling to grow at management’s projected rate.
With this being the case, as there are over 24 months until Tungsten reported its fiscal 2017 results, we can’t be certain that these forecasts will turn out to be correct. Anything could happen during this period.
Base case
As Tungsten’s future earnings growth is shrouded in uncertainty, it seems sensible to try and place a value on the company’s shares using the company’s book value.
Using the book value to work out Tungsten’s value is a crude but easy-to-use tool for identifying if the company is overvalued or undervalued compared to the value of its assets.
Tungsten’s book value stands at around 170p per share. That said, there is a lot of goodwill and other intangible assets on Tungsten’s balance sheet. These assets could be wiped out or written off over time.
Stripping out these assets gives a tangible book value per share of approximately 41p. So, on this basis, Tungsten remains overvalued at present.
The bottom line
Tungsten has failed to live up to the market’s lofty expectations for growth. And for this reason the market has turned its bank on the company. What’s more, based on Tungsten’s current financial position, it’s difficult to place a value on the group.
