Caffyns – cyclically adjusted price earnings ratio

PUBLISHED: 15 Dec 2017 @ 15:17 | Comments (0) |

Caffyns (LSE:CFYN) has produced reasonably good turnover and earnings figures for the six months to September considering the trauma that the car selling sector is going through – see yesterday’s newsletter. But what about earnings performance over an industry cycle? How does the current share price look in relation to the proven average annual earnings over the last ten and half years? This is what I want to examine today. I’ll build on the analysis presented in a newsletter when I bought these shares, dated 11.8.17.

First attempt at average earnings – the reported “basic” earnings

This includes all operating profits as well as the property profits. The company regularly classifies items such as redundancy payments as “non-underlying”. I’m not having that in any of my earnings calculations: all non-underlying are included – so this a warts an’ all approach.

Year end (in March)	Reported profit after tax (after including the “non-underlying” negatives and positives) £‘000	Earnings
2018 first half doubled	1,030	38.2p
2017	5,123	186.3p
2016	2,487	90.1p
2015	9,255	335.5p
2014	1,411	51p
2013	1,289	46.6p
2012	1,416	51p
2011	218	7.7p
2010	1,107	38.6p
2009	-3,969	-137.8p
2008	2,128	73.9p
Average earnings per share		71p

The cyclically adjusted price earnings ratio from this approach is 450p/71p = 6.3 – less than half that for the typical UK share of around 15.

But: The average is somewhat distorted by the 2015 profit. Most of that £9.255m (i.e. £8.861m) was in fact a result of pension rules changing (so that future pension could rise by only the RPI rather than the CPI).

Other year’s numbers are also distorted by unusual events. Now I’ll separate out the normal earnings from the unusual.

Earnings disaggregated

£’000s	2018 first half doubled	2017	2016	2015
Reported profit after tax	1,030	5,123	2,487	9,255
Adjustments	None	Deduct profit on L.Rover business sale: 3,839	Deduct profit on sale of property: 254	Deduct profit on sale of property: 566
			Add back the non-underlying cost of redeeming preference shares: 292	Deduct gain on pension switch from CPI: 7089
Profit after tax and adjustments	1,030	1,284	2,525	1,600
Earnings per share for the operating business	38.2p	46.7p	91.5p	58.0p

£’000s	2014	2013	2012	2011
Reported profit AT	1,411	1,289	1,416	218
Adjustments	None	Deduct profit on sale of property: 663	Deduct profit on sale of property: 706	None

Profit after tax and adjustments	1,411	626	710	218
Earnings per share for the operating business	51p	22.6p	25.6p	7.7p

£’000s	2010	2009	2008
Reported profit AT	1,107	-3,969	2,128
Adjustments		Deduct profit on sale of property: 261	Deduct VAT refund: 2,453

Profit after tax and adjustments	1,107	-3,708	-325
Earnings per share for the operating business	39.3p	-128.8p	-11.3p	Average EPS over ten years 21.1p

With average earnings per share of 21.9p Caffyns shares are on a CAPE of 450p/21.9p = 20.5, which is much higher than the market average. This is not encouraging.

However, I have been very harsh in excluding the profits made from dealing in property or from selling businesses. It seems likely that the directors are fully aware of the potential of their sites (and of new undeveloped sites) for gaining planning permission for schemes such as change of use, e.g. to residential, or sale to another business…….

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