Investment Matters

A quick note: share price performance vs operational performance

I thought it is worth highlighting the current extreme differences in share price performance compared with operational / actual financial performance of a number of companies in your equity portfolio.

Recently share prices moves of some companies are totally unrelated to the business performance and their operational conditions.

This can be hard for some to rationalise and understand.  For your Investment Team it is a source of short-term frustration.  But let’s look at two examples to provide confidence that the longer term is what matters.

We own two core medium-term growth small capitalisation companies CML Group and Paragon Care. We have owned each for many years, and clients have down well from both (even allowing for the recent downturn in their share prices).

Each of these companies had it's AGM in late November (i.e. less than three weeks ago).  Here is what they said about their businesses at their AGMs:

CML: Upgraded its profit expectation for FY-19 greater than $22m EBITDA (earnings before interest, tax, depreciation and amortisation), from $20-21m EBITDA.  Additionally, NPAT will be greater than $9m (which will be up greater than 38% on FY-18).

Paragon: Announced it has achieved 7% organic growth in sales for the first four months (above our assumed 5% rate), with gross profit margins greater than 40%.  It noted that it had sold a strategic share stake to a Chinese business in recent months for $0.91cps, and that a key “similar” player in the space had been acquired by a private equity investor for >12x EBITDA multiple (i.e. a high price).

Here is what has happened since both updates:

CML's share price has fallen 22%, and it trades on 8.9x its expected profit in FY-19 (which is the lowest price to earnings CML has had in the time we have owned it). It is expected to deliver a 5.6% dividend in FY-19 (before franking credits).

 

Source: IRESS, First Samuel

Paragon’s price has fallen 13.6%.  It trades on 9.6x FY-19 expected profit, and at a price 30% lower than China Pioneer paid in September, and 50% of the price paid by Navis Capital for Device Technology.

 

 

Source: IRESS, First Samuel

The key point here is that, whilst it is tempting to think that a share price fall indicates something about the businesses you are invested in, at times it can have nothing to do with it, what so ever...

The fall in these prices reflects the short-term nature of some of its shareholders, and/or their requirement for cash.  In the interests of your wealth, First Samuel looks beyond the short term.

- Dennison Hambling