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We can use the cyclically adjusted price earning ratio, CAPE, to give some perspective on the current share price expressed as a multiple of a company’s proven earnings over what might be regarded as an economic cycle. It is usually measured using ten years of earnings, which is thought to be a long enough period for a company to go through both boom and recessionary times as well as firm-specific troubles and firm-specific triumphs.
Of course, the CAPE is a crude metric and should never be used in isolation, but it allows us to roughly place a company on a spectrum of expensive-cheap if we know the average CAPE for the market.
A major difficulty arises if the nature of the businesses within the company change significantly during the ten years – then you have the problem of comparing, to some degree, apples with pears.
But at least you should expect that when the managers shift the from one strategic direction or another they should have reported a decent level of profits over a ten year span. And we might expect that the current share price is not excessive relative to average profits over ten years.
But what if there has been a dramatic shift in the centre of gravity of the company in the last three or four years, with large amounts of money and managerial time having been spent on building up the business of the future while pushing down the reported profits of the past? In other words, the pain has been taken in the past 3 4 years, i.e. within the 10-year CAPE, but the benefit will be experienced mostly from 2020 onwards.
Haynes (LSE:HYNS) has been going through a period of investing around £5m to £8.5m in new intellectual property in each of the last 3-4 years. I’ll try to figure out if this is likely to pay off at some future point in a later newsletter – this is largely a qualitative exercise although I do have some figures on the duopolies in a couple of European countries in which it is a player.
For now, I present the profits data and CAPE as reported.
The good years: paper publishing going well
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||
| Sales £m | 33 | 33 | 35 | 31 | 29 | |||||
| Profit before tax (before restructuring costs) £m | 7.2 | 7.2 | 7.1 | 7.1 | 7.1 | |||||
| Adjusted basic eps | 29p | 28.6p | 29.4p | 30.8p | 31.6p | |||||
| Basic eps | 29p | 28.6p | 29.4p | 30.8p | 31.6p | |||||
| Dividends per share | 15.7p | 15.5p | 15.5p | 15.5p | 15.5p |
The disappointing years: paper publishing in decline
| 2014 | 2013 | 2012 | ||||
| Sales £m | 29 | 28 | 30 | |||
| Profit before tax (before restructuring costs) £m | 4.2 | 3.2 | 4.7 | |||
| Adjusted basic eps | 18.7p | 14.2p | 20p | |||
| Basic eps | 7.4p | 14.2p | 20p | |||
| Dividends | 7.5p | 7.5p | 15.7p |
The getting-to-grips-with-a-new-business-model years: US and Australia paper falling significantly, but UK paper stabilised and professional services zooming away
| 2018 | 2017 | 2016 | 2015 | |||||
| Sales £m | 33.8 | 29.8 | 25.7 | 26.1 | ||||
| Profit before tax (before restructuring costs) £m | 2.9 | 2.7 | 1.9 | 2.5 | ||||
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