Character Group – bought for my Modified price earnings ratio portfolio

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I’ve purchased shares in the toy designer and distributor Character Group (LSE:CCT) at 350.6p (market capitalisation is £3.506 x 21.3m shares = £74.7m). These shares were trading at £5.80 as recently as August.  The fall was caused primarily by the merger of the UK’s Entertainment One with the US toy company Hasbro.

The connection here is that Entertainment One owns the intellectual property over Peppa Pig and Ben & Holly.  For a decade and a half EO has granted a license to Character allowing it to design Peppa Pig toys etc., get them made in the Far East and sell them in the UK and other countries.

So successful has this franchise been that it’s reckoned Peppa Pig products account for something in the region of one-fifth to one-third of Character’s turnover.  Naturally, Hasbro will want to produce its own range of toys based on the popular TV and film characters it now owns.  Thus, Character will lose a goodly slice of its business.

But I think the sell-off has been overdone.  Character has a history of phases of toy favourites coming and going; one year it is Scooby Doo, another its Postman Pat or Bob the Builder.

The key members of the management team each have three decades of experience. Adept at evolving the company to cope with changing fads and fashions they are constantly on the prowl for the next hot character.

Besides, about half of sales comes from product brands created in-house, such as slime and Squishes.

Also, the current Peppa Pig deal with EO has been extended to June 2021, so sales are not going to drop off a cliff.

Earnings and dividends

Yearend 31 August Earnings per share, p   Dividends per share, p   Revenue, £m   Profit after tax, £m
2019H1 21p (2018H1: 17p).  Expected for year: 43p 13p (2018H1: 11p) Expected for year 25p £58.8m (2018H1: £50.5m). Expected for year £124.6m £4.2m (2018H1: £0.5m).  Expected to be approx. £9m for year.
2018 45.63 23 106 9.6
2017 47.46 19 115 10.0
2016 50.3 15 121 10.8
2015 48.56 11 99 10.2
2014 27.66 7.25 98 5.9
2013 3.05 6.6 67 0.7
2012 25.58 6.6 75 5.8
2011 28.47 6.0 95 6.8
2010 20.12 4.0 85 6.2

There is already clear guidance on the numbers for the year to 31 August 2019: Earnings are expected to be 43p and dividends 25p.

Cyclically adjusted price earnings ratio

The CAPE, using average earnings per share over ten years in the denominator, is

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