Thursday, April 26, 2012

An even better French small cap: Precia Molen

"It isn’t exactly cheap. But it’s a good value." - Walter Schloss


For all the fear in Europe I'm finding good value, but not screaming bargains.  My dream is finding companies like Precia selling for less than NCAV, but the only place that exists right now is Japan.  Instead of once in a life time bargains the European situation is making good companies cheap, Precia Molen is one of those.  This company almost forced itself upon me, I received some comments and emails praising it after my post on Gévelot, it appeared on the list of comparables for Gévelot, a list Geoff Gannon created, and a trusted investing friend recommended I look at it, how could I not?

What they do

The easiest way to describe Precia is that they enable customers to weigh things.  They build scales and scale systems that range from small scales a laboratory might use to a scale system used at a truck weight station.  The scales I find most fascinating are their continuous scales.  A scale of this sort is installed onto a manufacturing assembly and will constantly evaluate volume or product weight.

A distinction I feel I need to make about their product is it's geared toward high usage applications.  They don't just make scales that people use to weigh things, they make scales that are integral in a customer's process.  In a manufacturing setting if a scale is broken a machine won't know when to stop filling packaging.  If a scale breaks in a lab researchers won't be able to conduct experiments.  I don't say this to mean that Precia has a moat, I don't think they have any sort of competitive advantage at all.  But I want to point this out because their product is a necessity.  A client will find a way to replace their product if it breaks, they can't defer replacement until times get better.  This is important because scales that are used often will eventually wear out no matter how well built they are.

Why invest?

I want to try to get back to the idea that a suitable investment thesis can fit on the back of a napkin, and present that with each post.  Here is my stab at a napkin thesis for Precia Molen:

A company that's been consistently growing profits the past ten years while steadily growing book value deserves to trade above book value with a P/E higher than 7.8 and a EV/EBIT higher than 3.6x.

Additional factors:

  • 43% of the market cap is composed of cash.
  • Debt is 21% of equity and interest is covered 38 times.
  • The company pays a growing dividend, past six years growth rate is 11.2%
  • Earnings growth rate for the past 10 years is 17.9%
  • ROIC of 17.12% and ROE of 13.4%
  • Expanding into India, Morocco, Brazil and Romania.
  • Management repurchased shares 


Earnings power

Most of my thesis rests on Precia's earning power, a company with their earnings power and growth shouldn't be trading at the level they are.  The question I first asked was is their business under pressure such that earnings are about to drop off a cliff?  The answer to this question comes from the company themselves, here's what they said:

The macro outlook is cloudy in Europe, but Precia believes that 2012 should be similar based on current demand.  This could obviously change at any time, but this is better than what Gévelot's management said, they said they were feeling the pressure and doing their best to react.

I put together a little spreadsheet showing earnings, earnings per share, and the growth rate for the past ten years.


The reason I did this was I wanted to see if a slowdown in earnings growth was leading to their undervaluation.  Often a company that is consistently growing will be punished by the market when growth slows.  I think this spreadsheet shows pretty well that while earnings have grown solidly it hasn't been a straight line, and each year hasn't blown out the last like Apple does.  The results have been lumpy, but lumpy in the right direction.

One thing that always makes a deep value person like myself nervous when looking at a company like Precia is I want to see where the cash is going.  Are shareholders being rewarded by purchasing and holding onto this company?  I created two graphs to show that I believe that's the case with Precia.

The first graph shows the equity value per share growth since 2006:

This graph shows the cumulative growth per share in assets, dividends and intangibles:



Risks

A lot of the reason this company is cheap is it happens to be located in the wrong spot, in Europe where business is set to seize up and everyone will be living on the streets soon (well at least if you read US media).  Looking beyond the hype there are a lot of headwinds facing companies over there, reduced demand, and increased financing costs to name two.  I really thought this over for Precia, how will this company fare?  Will I be looking back in two years wishing I would have just had cash and avoided the investment?

I took a step away from the headlines and thought about Precia's business and clients.  I have no reason to believe Precia's scales are of anything other than average quality.  The fact remains they're used often and they're high volume products.  Putting something heavy on top of a scale day after day will eventually wear the scale out no matter how well it's manufactured.  If these scales are integral to client processes the clients will be forced to upgrade no matter what the financial situation is.  They might pressure Precia to reduce their prices, but they will eventually need to upgrade their scale.  If not through Precia through a competitor.  Based on my experience with manufacturing companies if they have someone build out a system for them in almost all cases they will have that same company service it, and if the system lasts they'll have the same company replace it as well.

I should mention here the company isn't immune, they took a write down in the beginning of 2011 over their Irish operations.  The goodwill impairment was small around €300,000, but they were still impacted.

Final Thoughts

I read a fair amount about Precia, read through their annual report and looked back at their history asking myself "why shouldn't I invest?"  I couldn't come up with a good reason.  This isn't the cheapest investment I've ever found, but if the company executes in the future in a similar manner to how they have in the past I think this is a very good value buying almost exactly at book value.  I was initially disappointed that I wasn't finding quality net-net and cheap book value stocks in Europe.  Then I realized that if I fill out a portion of my portfolio with companies like Precia Molen at very reasonable valuations I will do fine over time.  This isn't the sort of investment that's going to return 75% in the next year, but I think in five or ten years I'm going to be very satisfied.

Talk to Nate about Precia Molen

Finding more information
Ticker: PREC.France
Website: http://weighing.preciamolen.com/
Annual reports: here
Reports in English (summary versions): here

Disclosure: Long Precia Molen

18 comments:

  1. Nate

    Also interesting to note that Francois Hollande (current favourite to win the French presidency) has proposed a tax reform that would include a drop in income tax for small and medium sized firms and a rise for large firms. I'm assuming that would benefit Precia Molen.

    Lawrence

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    Replies
    1. Lawrence,

      Very interesting find, that would be helpful to Precia for sure. I think there's some fear over Hollande becoming president, but Precia is an international company, they'll survive.

      Nate

      Delete
  2. Nate good writeup.

    There is also a good writeup of the company in the January 2012 letter of the great French value fund manager Admiral Gestion.

    Luckily they also publish it in English

    Here is the url:
    http://www.amiralgestion.fr/ENG/PDF/Investor/2012-January.pdf

    Nice weekend to you

    Tim

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    Replies
    1. Tim,

      Thanks for the comment and link. The article has a fascinating history of the company, it also reinforced my view that Precia's scales are critical to client processes.

      My only hope now is that Precia falls a bit more with the market so I could pick up more shares lower.

      Nate

      Delete
  3. Nate,

    as always great writeup. If you are looking for a competitor company, yoo could look at German company Sartorius. The have a segment which should be a direct competitor. However, Precia seems so be much more profitable.

    MMI

    P.S.: Great link from Tim, thanks.

    ReplyDelete
    Replies
    1. The Satrorius Industrial Scale business has an EBITDA of ca. 11%. Sartorius is trying to sell this activity it will be interesting to follow the development.

      Delete
  4. Certainly interesting but sadly not enough information with my prefered language. Good writeup any way!

    ReplyDelete
    Replies
    1. Understood, the language barrier can be tough. I can read some French but not really enough to tear apart the annual report. This is why Google Translate is your friend. For sentences I couldn't read I just pasted the block into Google Translate.

      I've also found that the language is almost the exact same for financial statements in all romance languages. Actif, Passif (French), attività, le passività (Italian), activos, pasivos (Spanish), assets, liabilities (English). If you know some of any romance language you can usually muddle through enough to get an idea, then translate the rest.

      Use Google Translate liberally! It's VERY accurate with European languages

      Delete
    2. I use Google Translate with Nordic languages as I have some understaning of one of them (Swedish) and others are very similar (expect Finnish - but thats my native). Really good tool.

      Jumping to completely other language seems quite "liberal" to me. But, then, Maybe I should try that, too. You are luring me to "uncharted" waters - first with Japan and now with new languages. :)

      Delete
    3. You're actually in a good spot, you could translate to Finnish and English, and then compare the results, you'll probably end up with a more accurate translation that way. Precia at least has annual summary reports in English which is nice, a lot of French countries have nothing in English.

      It's always good to be stretched!

      Delete
  5. Hello
    Good summary about Precia.
    It's one of my main holdings. I started investing in '04 at around 15 €, but sold half around 30 €. I could kick myself each time I think of it.
    One of their main competitors is Mettler-Toledo (world leader).
    Regards

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    Replies
    1. Thanks for the comment, also the note about Mettler-Toledo. Going from my in-laws to my parents we pass an office building of theirs and for some reason I always thought the name sounded like an insurance company not an industrial company. I need to look at them and compare their results to Precia.

      I'm guessing you're still holding onto the other half of your position in Precia? I'd love to add more if they drift lower, unfortunately outside of a crash I don't think that's going to happen.

      Delete
  6. Hi,

    The strategy of the company is to have 50% of its sales outside France by 2015 through acquisitions which can limit the impact of the French economic slow-down.

    Figures are goods but I'm hoping a better price to buy. By the way, volumes are really low !

    ReplyDelete
    Replies
    1. Hey,

      Interesting stat on 50% of sales from outside France, I agree that this would limit the impact from France's slowdown. Although France is one of the larger economies in Europe, so in some ways the exposure is good, maybe just not completely concentrated.

      Volume is very low! I put in a limit order and it eventually filled. You might need to build up a position over a few days or weeks.

      Nate

      Delete
    2. I sold Précia last month.

      If you like French small cap values, you can see also INFE (cash - debt > market cap !), VET or PVL.

      Delete
  7. Thanks a lot Nate.

    What do you think is the fair value for Precia?

    Thanks and regards

    ReplyDelete
    Replies
    1. Good question, for a company with their growth and strength I think they deserve a multiple of 15x or so, or at least 1.5x BV. Of course if the company keeps growing that's a moving target.

      Delete
  8. The company produces average quality scales. One of the subsidiary in Holland has gone bankrupt and there are pending lawsuits agains former shareholders..

    ReplyDelete