Wednesday, February 11, 2004
In a previous blog I claimed that in valuing Tate and Lyle, I would rather use the previous years' profits than broker predictions for next years' figures. This isn't a prejudice I apply blindly. This is a useful metric for certain types of stock, particularly companies with a large market capitalisation operating in a mature industry, such as Tate, the sugars manufacturer valued at £1b by the market.
Tate operates in an industry that is essentially going nowhere. That is true for most of the players in the foods sector, even more so utilities but I wouldn't apply this rationale to technology outfits or pharmaceuticals. If a company or an industry is indeed 'going nowhere' that needn't necessarily be a negative, the absence of exciting growth is often accompanied by a solid and dependable revenue stream - allowing chunky dividend payments. A company that is indeed going nowhere is highly desirable for the investor, if he can get in at a bargain price. It naturally follows that these steady, dependable companies will not report wildly fluctuating profits from year to year - without significant news one can expect profits to be pretty much the same one year as they were in the previous. This logic is so simple the brokers would regard it as amateurish, they prefer to use their models, spreadsheets and expert contacts in the industry to divine future profits and as the year progresses, they often so wrong a company is forced to issue a trading statement to guide the market. Unswerving faith in a broker prediction is sheer folly, as however, would blind faith in my `previous years figures' heuristic, examine the results statement, there may be significant exceptionals contained within.
"Why brokers just aren't capable", a future blog perhaps.
At nine times earnings Tate & Lyle would be sufficiently undervalued by my reckoning to remove a lot of the risks inherent in equity investment and allow plenty of room for appreciation. Don't get me wrong, at 277p Tate is undervalued but to leave me some room for error in my appraisals, I'm lowering the bar to 250p, with fair value at 324p.
The Artful Dodger
Tate operates in an industry that is essentially going nowhere. That is true for most of the players in the foods sector, even more so utilities but I wouldn't apply this rationale to technology outfits or pharmaceuticals. If a company or an industry is indeed 'going nowhere' that needn't necessarily be a negative, the absence of exciting growth is often accompanied by a solid and dependable revenue stream - allowing chunky dividend payments. A company that is indeed going nowhere is highly desirable for the investor, if he can get in at a bargain price. It naturally follows that these steady, dependable companies will not report wildly fluctuating profits from year to year - without significant news one can expect profits to be pretty much the same one year as they were in the previous. This logic is so simple the brokers would regard it as amateurish, they prefer to use their models, spreadsheets and expert contacts in the industry to divine future profits and as the year progresses, they often so wrong a company is forced to issue a trading statement to guide the market. Unswerving faith in a broker prediction is sheer folly, as however, would blind faith in my `previous years figures' heuristic, examine the results statement, there may be significant exceptionals contained within.
"Why brokers just aren't capable", a future blog perhaps.
At nine times earnings Tate & Lyle would be sufficiently undervalued by my reckoning to remove a lot of the risks inherent in equity investment and allow plenty of room for appreciation. Don't get me wrong, at 277p Tate is undervalued but to leave me some room for error in my appraisals, I'm lowering the bar to 250p, with fair value at 324p.
The Artful Dodger
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