I have been neglecting this blog as the soap opera that is American politics has been playing out. Trump’s decision to go for it full throttle straight from the off looks like resulting in political war in the US which will no doubt result in a messy few weeks, if not months, ahead. The jury is still out on whether this new form of extreme politics can survive indefinitely, or whether one of Trump’s skeletons will come crashing out of the closet, or whether Trump gets catch out dealing with an unexpected event. For the Democrats, there is the depressing thought that if Trump messes up big time, the option of impeachment requiring their consent to a two third majority in congress, would only result in President Pence!
My instinct is telling me to reduce equity exposure currently, on valuation concerns rather than political ones, and my hard fought for risk management discipline means I am acting on that instinct. I also distrust the neatness of the market consensus that markets will rise on stimulus hopes to mid year before falling back to sustainable valuations by year end. Reality is never neat, especially I suspect in Mr Trumpland. Notwithstanding this environment, one of my new year’s resolutions was to try and get some new equity ideas to track and maybe pick up if valuations get more attractive.
The disappointing results from Pearson Plc two weeks ago reminded me of my last post on the technological changes disrupting the education sector. I thought I would have a quick look over some of the firms mentioned in that post three years on. The trends at Pearson are not pretty, as the graph below shows. Particular poor results in the US higher education sector mean the firm is selling off Penguin Random House and “taking more radical action to accelerate our shift to digital models and to keep reshaping our business”. Pearson’s stock is down over 50% since my last post three years ago and another shakeup in management, if not strategy, looks inevitable.
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In fact the hope that the juicy margins of the old world text book business can be transferred to the new on-line world is looking fanciful. The shift to on-line education looks like another example of technology gutting the margins of yesteryear’s reliable business models. Houghton Mifflin Harcourt (HMHC) has a younger school focus and was the main education stock featured in my 2014 post. HMHC too is down considerably over the past three years, approx 42%. The graph below shows the downward trend in its core revenues and margins.
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So it looks like hoping established education firms can transition with seamless profits into the digital world is not a place to look for new investment ideas. Of course, there have been big successes in the online sphere from newer firms and business models. TAL Education (ticker TAL), the Chinese K12 after school online tutor, is one and it’s up approx 250% over the past three years. It’s outside of my risk appetite as I prefer large diverse established firms with a clear market advantage, an understandable reason for upside and a management team I can believe in to entrust my optimism.
The search for new ideas goes on…
PS – Any ideas out there would be greatly welcome!
Posted in Equity Market, Investing Ideas
Tagged American politics, Bad education, Chinese K12 market, Common Core State Standards, digital disintermediation, digital model, education textbook sector, HMHC, Houghton Mifflin Harcourt, John Fallon, K12 sector, online education, online learning, Pearson Plc, Penguin Random House, President Pence, PSO, PSON, risk management discipline, TAL, TAL Education, technology education sector, Trump’s skeletons
In May last year I posted on an undisciplined investment, Trinity Biotech (TRIB), which I bought at $21 per share and, after ignoring some basic investing rules, didn’t sell until it hit $16. I had thought that the underlying metrics of TRIB existing business would improve, with a big upside potential with the FDA approval of its Meritas Troponin Point-of-Care test (as outlined in this post). Since last year, I have kept an eye on the firm as their operating results continued to be uninspiring, as per the graph below.
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I continued to monitor the firm from afar to see how the FDA approval was progressing, for curiosity sake more than anything else (the investment case was similar a coin toss given the operating results and I have, thankfully, grown out of such gambles). The timing of any final approval was dependent upon FDA queries but Q4 was been talked of as a possible time for a final FDA decision.
It has therefore come as a considerable shock to all stakeholders, and a 50% collapse in the share price, when TRIB announced early on Tuesday that it has withdrawn its FDA application for the Troponin test on the advice of the FDA itself. Analysts representing investors vented their anger at the company’s management on the conference call on the news (worth a listen if you are so inclined).
I genuinely felt sorry for management as they tried to explain the “devastating news” about how they could have got the FDA approval so wrong. Although the FDA would not go into the gritty details on a 30 minute call communicating the news to management behind their “minded to refuse” position, TRIB’s management were restrained in expressing their (obviously very disappointed) view that the FDA had moved the goal posts in their assessment criteria. The FDA will give TRIB more detail on their decision over the coming months (strangely only on the condition that TRIB withdrew their application).
Management expressed their view, based upon the information from the FDA call, that any new application was unlikely given the large R&D expenses needed to address the issues raised and announced they would shutter the programme, reducing their annual capitalised expenses from $9 million to $1.5 million including the closure of their Swedish facility. Given they capitalise most of these expenses, the impact will primarily be on cash-flow rather than on the P&L (they may manage to be cash-flow neutral on a pro-forma basis). Insight into future operating results and what the balance sheet will look like after the write-offs needed on this withdrawal may come with the Q3 results.
At a share price of approx $6.50, TRIB indicated that their Board would likely instigate a large buy-back programme after the early release of their Q3 results (likely due by mid October). With $85 million of cash left from their $100 million convertible debt, TRIB has the firepower if it can get to positive cash-flow on an operating basis in the near term. Analysts were very blunt in their reaction, stating that management now had a major credibility issue and that a sale of the firm should now be the priority.
All in all, a sad day for TRIB, its employees and its future prospects. And, of course, for its shareholders.
Posted in Investing Ideas
Tagged autoimmune, averaging down, behavioural economics, biotech, biotech investing, biotech investments, convertible debt, Crohn’s disease, diabetes, FDA approval, Fiomi Diagnostic, Graves disease, HIV tests, Immco Diagnostics, infectious diseases tests, investment discipline, investment mistakes, Lyme sales, Meritas Troponin cardiac tests, POC immunoassay platform, point-of-care cardiac tests, Premier diabetes instruments, Premier reagent sales, rapid syphilis test, TRIB, Trinity Biotech, Troponin FDA trials, Troponin POC tests
It has been about 10 months since I posted on the potential for the Paddy Power and Betfair merger and a lot has happened since. Brexit and the resulting sterling volatility are obvious events of significance. In the betting sector, consolidation has continued with the Ladbrokes and Gala Coral merger having been announced and approved. The audacious proposed tie up by Rank and 888 on William Hill floundered with recent press reports suggesting Rank and 888 could get together. The consolidation in this rapidly changing sector is far from over.
The initial optimism on the future prospects for the two high achieving entities, Paddy Power and Betfair, resulted in the share price trading above the £100 level earlier in the year. Following Brexit, it traded as low as £80. The merged firm reported their H1 figures earlier this week which showed the full extent of the merger costs and provided an increased cost synergies figure for 2017 of £65 million. With 75% of EBITDA being sterling based, the currency impact was not as material as their multi-jurisdictional operations would suggest.
Top-line results for H1 do however indicate that 2016 revenue growth will likely not be as high as the 17% I had expected in November. The reality of issues in this regulated and highly competitive sector also served as a reminder that the path may not be as smooth as initially hoped for. Regulatory headwinds in Australia were an example. As a result, I revised my revenue estimates in November from £1.64 billion to £1.51 billion. The graph below shows the breakdown of my revenue estimates for the next few years with a comparison to overall average analyst estimates.
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Also, I have revised my previous earnings estimates with an operating profit margin of 20% for 2016, growing to 22% in 2017 and 23% in 2018. Based upon a share count of 86 million as at end June 2016 (which includes 2 million treasury shares), I estimate the H2 EPS at £1.55 which when added to the H1 EPS of £1.45 gives a full year 2016 EPS of £3.02.[ This 2016 estimate does represent an operating EPS of £3.79 which compares to my November estimate of £3.85 albeit that the November estimate was based upon suspect figures like the share count!!]. At today’s share price of £95.65, the PE multiple for 2016 is a hefty 31.6. The graph below shows the multiple based on my EPS estimates for 2016, 2017 and 2018 compared to those using the average analyst estimates.
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In conclusion, I remain optimistic about the business model of Paddy Power Betfair particularly given the proven quality of the management team and their history of execution. However, quality doesn’t come cheap and the current valuation is priced for perfection. For new investors, it may be prudent to wait for a better entry point.
Posted in Gambling Sector, Investing Ideas
Tagged 888, Amaya, Andy McCue, Australia betting sector, BetFair, betting and gambling sector, betting consolidation, betting exchange, betting firm merger, Breon Corcoran, disintermediating betting exchange, earnings forecasts, earnings growth 2016, Full Tilt, gambling regulations, Ladbrokes, M&A gambling, Machine Games Duty, MGD, mobile adoption, online betting, online casino, Online Gaming, online poker, Paddy Power Betfair, PaddyPower, POC, Point of Consumption tax, Pokerstars, PPB analyst estimates, PPB earnings, PPB EPS estimates, PPB projections, PPB revenue growth, PPB valuation, PPB.L, Rank 888, regulatory changes, William Hill, William Hill Rank 888